TBAs with Variation Margin Processing Notes

The Federal Reserve Bank of New York Treasury Market Practices Group (TMPG) introduced margin requirements for all mortgage-backed securities (MBS), mainly transacted as To Be Announced (TBA) trades, in order to reduce both counterparty and systematic risk. In the TMPG’s words "... the forward-settling nature of most agency MBS transactions exposes trading parties to counterparty credit risk between trade and settlement." The new regulations recommend that two-way variation margin (VM) be exchanged daily until the TBA settlement date has been announced and the trade has been settled when "... the settlement date is more than one business day after the trade date." This protects both parties from counterparty credit risk in the interim.

While Accounting does not have core support for TBAs with VM, they can be modeled using the core Futures functionality, which incorporates automated VM processing. On settlement date, the Futures can be closed out and positions in the resulting MBS pools can be opened. Refer to Instrument Engineering's Futures (FUT) Best Practices for details about Futures processing in Eagle.

To accommodate TBA pricing conventions, the security master file (SMF) should be set up as follows.

• Price Multiplier (18) = 0.01

• Contract Size (19) = 1.00

• Variation Margin (4533) = Yes

• Variation Margin Rule (2289) = Standard Life to Date