BNY Mellon Includes MBS In Derivatives Margin Management Service

BNY Mellon has expanded its derivatives margin management service, DM Edge, by including forward-settling mortgage-backed securities (MBS), as recommended to help reduce counterparty and systemic risk by the Treasury Market Practices Group (TMPG), sponsored by the Federal Reserve Bank of New York.

TMPG recommends that “two-way variation margining should be exchanged on a regular basis,” because this type of trade settlement is often scheduled in the future at a date to be announced, or “TBA,” within a 48-hour window. The TBA market serves a critical function by allowing mortgage lenders to hedge risk and fund their loan origination pipelines, and facilitates the forward trading of mortgage-backed securities with defined settlement dates for each month in the future. The liquidity of this market also supports efficiencies, with cost savings for lenders that are passed on to borrowers in the form of lower rates. Given its volume and liquidity, the TBA market is the most important secondary market for mortgage loans and represents capital flow from a wide range of investors.

“Through DM Edge, MBS trading counterparties can reduce the credit risk inherent in forward transactions by exchanging collateral, or margin, as protection against loss in the event of default,” said Nadine Chakar, head of product and strategy for BNY Mellon’s Global Collateral Services business.

“Unmargined, bilateral agency MBS trades can pose counterparty risk to market participants, which is why TMPG recommends that exposures from forward-settling transactions, inclusive of agency MBS transactions, be margined beginning in early June 2013 and substantially completed by the end of the year,” said Chakar.