In mid-November, the Treasury Market Practices Group ("TMPG") of the New York Fed recommended that forward-settling agency mortgage-backed securities (MBS) be margined in order to prudently manage counterparty risks. The TMPG has encouraged market participants to COMPLETE the implementation process by EARLY JUNE 2013. The TMPG collateralization recommendation was issued as part of broader set of best practices that are available here.
Market participants should note two key items:
- If implemented, then the recommendation will more than likely require all market participants to document forward-settling MBS trades under a Master Securities Forward Transaction Agreement or MSFTA. The most recent version of the MSFTA is available here. And, like other forms of master agreements, documentation means negotiation.
- Any registered investment company (i.e., 1940 Act mutual fund) should give consideration to applicable regulatory issues, such those that relate to custody of fund assets under Section 17 of the Investment Company Act of 1940. For example, a mutual fund is permitted to maintain custody of its securities and investments at a member of a national securities exchange, provided that the custody arrangement meets the requirements of SEC Rule 17f-1. By way of non-limiting example, the broker must hold the assets pursuant to a written contract that has been ratified by the fund's board of directors. Further, the broker may not rehypothecate or pledge the fund's assets. What would be the alternative to keeping TBA margin at the broker? Good question - and the answer is...a tri-party control agreement among the fund, its board approved custodian, and the broker to the forward MBS trade. To learn more about tri-party control agreements, you may go to an October 2010 posting from TSR and available here.
Now, with all of that in mind, we conclude roughly where we started: the TPMG recommends that the implementation of forward MBS/TBA margining be completed by June 2013.