Eagle recommends processing these events as exchange offers. There is also a minimal cash settlement along with the exchange, which represents the time-value difference in delay days between the parent and new security, called Float Compensation.

• Investors will be able to exchange 45-day PC’s for 55-day mirror securities backed by the same loan pool

  • This is open to holders of TBA and non-TBA PCs

• The exchange is voluntary, and as of May 2019, there is no official end to the exchange offer

• Freddie Mac will compensate holders for the 10 day payment delay difference between the 2 securities

  • A http://www.freddiemac.com/mbs/exchange/grids.html calculator is available from Freddie Mac and is updated daily

• Exchange will be treated as non-taxable by the IRS

  • There has been no official ruling on the taxability of the Float Compensation as of July 2019 

• All newly issued UMBS will follow the current labeling conventions of Fannie Mae MBS (pool prefixes and TBA CUSIP)

• Bloomberg provides four new data fields as part of the Single Security Initiative:

  • UNIFORM_MBS_LEGACY_POOL_NUMBER (DW111): tracks legacy security reference pool in Mirror UMBS

  • UNIFORM_MBS_LEGACY_POOL_CUSIP (DW112): tracks legacy security reference CUSIP in Mirror UMBS

  • FANNIE_MAE_ISSUER_CONCENTRATION (DW121): percentage of underlying loan pools from Fannie Mae

  • FREDDIE_MAC_ISSUER_CONCENTRATION (DW122): percentage of underlying loan pools from Freddie Mac

• Since all features of the UMBS mimic features of Fannie Mae MBS, outstanding Fannie Mae MBS will not need to be exchanged to be fungible with the new UMBS securities

• From a GAAP perspective, Freddie Mac has received accounting guidance from the SEC that it would treat the exchange as a minor modification, using the cost basis of the legacy security to establish the new security

  • The resulting Float Compensation will be treated as a cost basis adjustment on the new security

Visit the Freddie Mac and/or Fannie Mae websites for more details:

• http://www.freddiemac.com/mbs/exchange/index.html

• http://www.fanniemae.com/portal/funding-the-market/single-security/index.html

Entity Setup

 There are three fields at the accounting basis level specific to MBS.

• Gain Loss on Paydown (1871, required): determines whether treatment of gain/loss resulting from paydown transactions is posted as Gain/Loss or Amortization

• Paydown Gain Loss Account (4519): determines whether general ledger posting for gain/loss on paydowns to hit Capital or Income (required if Gain Loss on Paydown set to Gain/Loss)

• Principal Loss on Paydown Processing Flag (2925): allows alternate methods of posting a loss on a paydown transaction (default = Realized Gain/Loss)

Please refer to the Fixed Income Processing User Guide 2015 for more details on the implications of these fields.

Reference Data

Storage & Configuration

A voluntary Exchange Offer corporate action announcement is required to exchange the legacy MBS to a Fannie Mae or new UMBS. Setting up the corporate action record as voluntary will allow you to select the specific entities opting to process the exchange. If all held positions of the legacy security/CUSIP are being exchanged, then the corporate action can be applied as mandatory. To facilitate the exchange, the "new" UMBS fungible security needs to be created in Eagle prior to creating the corporate action announcement.

Security Data

Reference data attributes of the "new" security generally match the parent security except for the payment Delay Days (1799), which is changing from 14 to 24. The list below shows the minimum required fields to create an MBS.

New Security

• Issue Name (961)

• Primary Asset ID Type (1432): typically CUSIP

• Primary Asset ID (14): 313XXXXXX

• Processing Security Type (3931) = DBFBFB

• Issue Country (2290): United States

• Asset Currency (85): USD

• Issue Tax Type (668): US or applicable country code

• Primary Exchange (17): typically OTC

• Coupon (70): fixed coupon of the MBS

• Coupon Type (97) = (F) Fixed

• Day Count Basis (471): 30/360

• Payment Frequency (2287): 1_M (Monthly)

• Delay Days (1799): 24

• Delay Days Type (5074): NULL or Calendar (produces same result)

• Issue Price (69): 100

• Issue Date (68): earliest allowable Trade Date for the MBS

• Dated Date (1183): "Interest Accrual Date" from Bloomberg

• First Coupon Date (473): "1st Coupon Date" from Bloomberg

• Last Coupon Date (473): populate with the penultimate coupon date

• Maturity Date (38)

• Maturity Price (42) = 100

• Trading Flat (3949) = No

• Zero Coupon Indicator (1300) = No

Market Data

MBS factors need to be sourced and stored as Final Factor corporate action announcement records. The initial factor at trade time can be added directly through Book Trade by changing the default value of 1.00 to the current month's factor prior to submitting the trade. The list below contains all fields required to create a Final Factor corporate action announcement.

• Asset ID (14)

• Sweep Date (1197): date corporate action is to be applied; typically same as Effective Date

• Effective Date (65): trade date of the factor (same as ex-date); typically the first of the month

• Corporate Action Status (54): set to Released when ready to apply

• Corporate Action Sub Priority (3961): defaults to 1; used for sequencing order of corporate actions when multiple records exist for the same security/ex-date

• Mandatory/Voluntary Indicator (1734) = Mandatory

• Factor Rate (1696): enter monthly factor

• Corporate Action Type (1728) = Factor

Trade Processing

There is no change to the trade processing workflow as a result of this initiative. There should also be no change to your current TBA workflow.

Exchange Processing

Eagle recommends processing a voluntary non-taxable Exchange Offer with cash to convert legacy MBS into the new fungible Fannie Mae and/or UMBS. Please note that the Exchange can be applied as mandatory if all positions are being transferred to the new security, otherwise process as voluntary. The legacy MBS will be exchanged for a new MBS and an additional cash receivable that represents the Float Compensation. The cash payment will be spawned from the parent security and reflected as a cost basis decrease on the new security. This cash receivable can be posted via the Rate of Action (Cash) (1692) field on the Exchange Offer corporate action announcement panel. Use the calculator on Freddie Mac's website to calculate the correct amount. The result is considered an estimate, however, running the tool within a few days of settlement should yield accurate results. The actual will not be confirmed until Freddie Mac settles the transaction.

Once the exchange has been applied, the parent position's Original Face/Current Face is reduced to 0 and a position in the new security is established. The new position will reflect a reduction in Amortized Cost by the amount of Float Compensation when compared to the parent security.

Exchange Offer Required Fields

This list includes some optional fields as well for informational purposes.

• From Asset ID (14): parent security's ID

• From Post Action Price (369): populate with most recent price of parent security

  • Not used when Share Taxability (3960) = No

• Sweep Date (1197): date corporate action is to be applied; typically same as Ex Date

• Ex Date (65): trade date of the exchange

• Record Date (1694): optional

• Announcement Date (1260): optional

• Pay Date (1275): typically Ex Date + 2

  • If populated, this will be the Settlement Date and interest accrual end date of the Exchange Offer transaction

  • If not populated, Settlement Date will default to Ex Date

  • Required if Rate of Action (Cash) (1692) > 0.00

• Treatment of Interest Indicator (1709): defaults to Transfer

• Corporate Action Status (54): set to Released when ready to apply

• Corporate Action Sub Priority (3961): defaults to 1; used for sequencing order of corporate actions when multiple records exist for the same security/ex-date

• Share Taxability = No (holding period and lot integrity from parent security are propagated to new security)

• Mandatory/Voluntary Indicator(1734) = Voluntary

• Cost/Proceed Flag (1715): defaults to Proceed

• Exchange Offer Type (2291): defaults to Price

• Rate of Action (Cash) (1692): populate with Float Compensation / Current Face of new security (between 0 and 1.00)

  • Example: 300 Float Compensation / 900,000 Current Face = 0.0003333333

• Cash Taxability (3963) = No

• Cash Currency (3962) = USD

• To Asset ID (1348): new security's ID

• To Post Action Price (319): populate with most recent price of parent security

  • Not used when Share Taxability = No

• Rate of Action (1101) = enter 1.00 to exchange 1:1

• Corporate Action Type (1728) = Exchange Offer

Add Voluntary Corporate Action Election

Skip this step if Corporate Action record established as Mandatory

Start by querying for voluntary corporate action records.

• Asset ID (14): parent security's ID

• Voluntary Corporate Action Begin Date (71): populate with ex-date, or an earlier date to query a range

• Voluntary Corporate Action End Date (73): populate with ex-date, or a later date to query a range

• Click Submit

Select the appropriate record(s), then click Add Entity Election Detail and populate the next screen as shown below.

• Entity ID (1163): fund that has elected the exchange

• Elected Shares Percent (1001) = 100; resulting value in panel will be 1.00

• Entity Election Status (54) = Released

• Click Submit to confirm the entity's eligibility for the voluntary exchange

Global Processing

Open Global Processes/Process Center > Corporate Actions > Exchange Offer.

• Select Query Option (2283): All Entities/One Security or One Entity/One Security

• Asset ID (14): parent security's ID

• Corporate Action Begin Sweep Date (220)

• Corporate Action End Sweep Date (221)

• Click Submit to apply the voluntary exchange to all entities that have opted in

  • All financial details from the parent security will propagate to the new security

Cancel & Rebook

Use Cancel Corporate Action (One Portfolio) if action has already been applied to the position. If you need to replay a voluntary corporate action, you must re-elect the holding entity participation via Add Voluntary Corporate Action Election.

Use Cancel Global Corporate Action Announcements if action has been scheduled, but not yet applied. 

Alternate Processing

To accommodate clients that require alternate processing, possibly due to unique accounting requirements or processing constraints, this activity can also be applied using the substitute methods below.

• In lieu of processing the Exchange Offer corporate action, you can use free Deliver/Receive transactions

  • The parent security should be delivered off the fund and new security received on with no impact to cash

  • The new security can be applied with a haircut/decrease to cost by the amount of the Float Compensation

• In lieu of using Rate of Action (Cash) on the Exchange Offer corporate action, you can post a miscellaneous income entry for the Float Compensation

  • The amount will be reflected in the current period's income balance and settled as a separate entry to cash

  • If Exchange Offer corporate action was applied, ensure Rate of Action (Cash) = NULL on the announcement

  • Note: a Rec/Pay Event may need to be configured in order to post this entry to the desired Income and Receivable accounts

    • Rec/Pay Events allow you to make cost, cash, and income adjustments that affect Accounting (including the ledger) and flow to Data Management

• A Cost Basis Adjustment or Impairment can be applied to record the Float Compensation

  • The adjustment has to be configured in a manner to allow for cash settlement

  • Because these adjustments do not generate a cash settlement, a second entry between receivable and cash will also be required

  • Once the Rec/Pay Event has been configured, the entries can be posted via Cost Basis Adjustment and Post Misc. Income - Asset Specific (V17)/Post Miscellaneous Income, Asset Specific (prior to V17) 

Known Issues

• Reporting: interest amounts between parent and new security may be incorrect on the Consolidated Earned Income Report when comparing total income between the parent and new security.

• Amortization: there may be exceptions on the Ledger Subledger Reconciliation Report for amortization between the parent and new security due to the exchange; a yield recalculation may occur on Ex Date +1 by the amount of the Float Compensation

• Amortization Yield: the Exchange Offer corporate action will always process the yield recalculation retrospectively, regardless of the retrospective/prospective election on the amortization/accretion rule (SDP-25488)

• Stale Factor Processing: if Stale Factor Processing (8141) = Yes at the entity level, there may be rollback/replay issues with re-establishing the updated position once the exchange is processed (SDP-25006: fixed in 2015 R2.36 and above)