I. Legal structureAs the Recommendation establishes that protection is provided under a formalized security agreement. The industry standard for such a collateral agreement between parties trading in mortgage-backed securities is the Master Securities Forward Transaction Agreement (MSFTA). Fortunately, the Securities Industry and Financial Markets Association (SIFMA) recently revised its recommended standard model for the MSFTA, which can serve as a starting point for counterparty trading. However, this is only a starting point and the detailed terms must be negotiated and agreed between the commercial parties. This may take months, but it is an essential part of complying with the recommendation. Despite this delay, many buy-side players are concluding their negotiations on transaction agreements for the first time (MSFTA) with brokers. These agreements often contain provisions that defer the exchange of margins until FINRA has concluded its rules. This approach reduces counterparty risk as it provides the buy-side company with the benefits of defaults and close-out and clearing procedures established when a broker becomes insolvent or breaks down under the MSFTA for other reasons. (At the risk of saying the obvious, asset managers who take such an approach can only do so if their client agreements do not require disguises from ASAs.) The TMPG RecommendationAs after TMPG`s formal recommendation, “the settlement nature at the front of most of the Agency`s MBS transactions exposes trading parties to counterparty credit risk between trade and settlement.” In order to reduce this risk, the TMPG recommends that participating counterparties enter into a security framework agreement defining the margining aspects of the relationships such as the frequency of security calls, the date of such calls and the adequacy of collateral, as well as more demanding terms, such as thresholds, valuations, both of exposures and guarantees, and liquidation conditions. TmPG is aware that to meet these recommendations, some companies need to implement new security solutions that take time to implement and can be complex if integrated into existing systems and processes. As a result, TMPG first gave the industry about seven months to make these changes, and then extended the deadline until the end of 2013. A user agreement where the parties may enter into transactions in which one party (a “lender”) lends certain securities to the other party (a “borrower”) against a transfer of collateral.
a user agreement in which the parties may enter into transactions in which one party (a “Seller”) agrees to transfer securities or other assets to the other (a “Buyer”) against the transfer of funds by the Buyer, with a simultaneous agreement by the Buyer to transfer such securities to the Seller at any given time or upon request; against the transfer of funds by the seller. A contract of use where the parties enter into transactions involving the purchase or sale of mortgage-backed securities and other securities that may be determined, including under issuance, TBA, dollar roll and other transactions that may result in or lead to the late delivery of securities. Press release › In its submission, FINRA indicated that the purpose of this delay was to consider additional amendments to Rule 4210, which would help avoid unnecessary disruptions to the market for special purpose securities (or TBA). This isn`t the first time finRA has indicated it plans to change the 4210. To date, finra has not proposed any such changes. III. Operational/Technical ReadinessThe entity that trades or will engage in trading has no operational or technical expertise in the area of collateral or systems to properly support security operations. For these, setting up an in-house solution or using existing licensed technology is not an option….