The Single Security Initiative between Fannie Mae and Freddie Mac goes live soon with the first settlement day scheduled for June 3, 2019. The driving force behind this initiative is to support liquidity in the To-Be-Announced (TBA) marketplace with anticipated positive downstream impacts for borrowers, taxpayers and investors.
This initiative will introduce a new breed of pass-through securities called Universal Mortgage Backed Securities UMBS™ and Supers™. Getting ready for these new securities involves defining best practices and workflows and updating the systems that support them. Specifically, SS&C has identified two broad categories for the transition and ongoing support of this new breed of securities: Exchanges and Trading Practices.
One element of the Single Security Initiative will be allowing holders of FHLMC pools to exchange the pools for an “equivalent” UMBS. The exchanges will have accounting ramifications as the basis of the old pool will move to the new pool. In addition, the pools themselves have a slightly different payment structure with changes to the “days delay” window from 45 days to 55 days. This will result in interest compensation to account for as part of the exchange. As of today, the IRS is still reviewing potential tax implications related to the exchanges.
From a trading perspective, companies that have automated TBA trading will need to respect new logic for TBA CUSIPs and the related allocation and validation rules for UMBS. The use of the “01F” prefix currently used will be expanded to encompass the UMBS where it has traditionally indicated FNMA securities. It will be important to consider unique needs at the time of transition, especially deals that will be allocated as the initiative takes effect. Up to the go live date, the identifier will designate FNMA securities only with a “line in the sand” for its expanded use. Also, while there are no anticipated changes in Electronic Pool Notification messaging formats, there are some aspects for clearing that need to be tested with the FICC.
These are just a couple of the considerations that SS&C is working through to be prepared for the Single Securities Initiative. As SS&C’s CAMRA supports a number of large insurance companies who are active in the TBA market, we are publishing a solution paper this July. To learn more about this initiative, read Fannie Mae’s “Single Security Initiative Market Adoption Playbook”.