By Eugene Grygo
May 31, 2019
An ISITC technical guide focuses on the FHFA effort to foster a common mortgage-backed security.
A key group of the ISITC organization for operations standards has issued a guide for industry participants to help them comply with the start of the “Single Security Initiative” of Fannie Mae and Freddie Mac, an effort to foster “a common mortgage-backed security.”
The technical guide, “US Settlements and Confirmation Common Elements Market Practice,” was put together by the Settlements Working Group of the International Securities Association for Institutional Trade Communication (ISITC) in response to actions by the Federal Housing Finance Agency (FHFA).
As of early May, the FHFA issued a final rule “to improve the liquidity of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)” via the implementation of “the Uniform Mortgage-Backed Security (UMBS) — a common, fungible MBS that will be eligible for trading in the TBA market for fixed-rate mortgage loans backed by one-to-four unit (single-family) properties,” according to an official announcement via the Federal Register.
“The final rule codifies alignment requirements that FHFA implemented under the Fannie Mae and Freddie Mac conservatorships. The rule is integral to the successful transition to and ongoing fungibility of the UMBS. FHFA has announced that the enterprises will begin issuing UMBS in place of their current TBA-eligible securities on June 3, 2019,” according to the announcement.
The full text of the FHFA announcement can be found here.
The ISITC market practice document focuses on the key field requirements and usage guidelines such as business data requirements, market practice rules, messaging issues, transaction codes and related information that participants will need to supply for UMBS transactions, according to ISITC.
For instance, the guidelines cover two primary roles “involved in a security settlement and/or confirmation message:” the “Settlement Instructing Party” — the investment manager, hedge fund, service provider or outsourcer; and the “Settlement Recipient” — custodian, accounting agent, central securities depository (CSD), international CSD, and prime broker.
In addition, ISITC collaborated with securities industry advocacy group SIFMA and Freddie Mac on the initiative, officials say.
“SIFMA recently published a fact sheet that offers contextual descriptions around the exchange and how the market should proceed. Freddie Mac has attended numerous ISITC events over the past year to inform ISITC’s membership of the changes and provide a clear direction as to what processes will minimize the impact for all constituents in the market,” according to a statement from ISITC.
“There’s been a lot of debate about corporate actions and trade solutions in response to this mandate, so ISITC offered a common platform to bring all of the industry players together to determine the proper reaction for moving forward,” says Aundrea Jarvis, co-chair of ISITC’s Settlements Working Group, in a prepared statement.
“The Single Security Initiative is a significant event to our industry,” Jarvis adds. “At ISITC, our membership’s diverse set of skills and subject matter expertise gave us a broader lens to solve for this issue. The ISITC forums and working groups complement one another for quicker consensus and adoption of standards.”
The ISITC will be amended as needed and the Settlements Working Group will be working on refinements at ISITC’s Fall Forum in Baltimore, MD on September 15-17, 2019.
This market practice document has been developed by as a statement of professional practices recommended by ISITC. Institutions providing the information recommended in this document will benefit from the efficiencies inherent in a more automated transaction process. Although all institutions are encouraged to act consistently with this document, none are required to do so, and a failure to do so is not, in and of itself, evidence of negligent or inappropriate conduct
The full guide can be found here.