Occasionally our readers send questions directly to our investment professionals. Answers to selected questions will be published on the blog. Feel free to continue to send in your questions — click the envelope icon on the top right of the screen to send us an email. Client Portfolio Manager Mark Peterson answers questions regarding margining for agency MBS below:
What is the TMPG and what is it recommending?
The Treasury Market Practices Group (TMPG) is sponsored by the Federal Reserve Bank of New York and is composed of senior business managers and legal and compliance professionals from a variety of institutions. The TMPG meets regularly to discuss and promote best practices related to trading, settlement and risk management in the Treasury, agency debt and agency MBS markets. From time to time, the TMPG publishes guidance to market participants.
In November 2012, the TMPG strengthened its existing Best Practices for Treasury, Agency Debt, and Agency Mortgage-Backed Securities Markets to include a recommendation that forward-settling agency MBS transactions be margined in order to prudently manage counterparty exposures. In March 2013, the TMPG set its recommended implementation timeline as December 31, 2013 for market participants to be substantially complete in implementing mortgage margining.
What is covered by the TMPG’s recommendation?
The TMPG recommends that margining be applied based on the type of agency MBS transaction and the existing market trading and settlement conventions for each transaction type.
The TMPG recommends that market participants exchange two-way variation margin on a regular basis to prudently manage counterparty risk.
Why the change?
The forward-settling nature of most agency MBS transactions exposes trading parties to counterparty credit risk between trade and settlement. Because of the size of this market, unmargined trades can also bring systemic risks to overall market functioning if a market participant were to default. Counterparties can help mitigate these risks by exchanging margin as the market value of the deliverable securities fluctuates.
Further information from the TMPG regarding this recommendation can be found at the following link: http://www.newyorkfed.org/tmpg/margining.html
How does this change impact the agency MBS investment market, and what is J.P. Morgan Asset Management (JPMAM) doing to address this new requirement?
The operational changes that will occur due to these new requirements are not expected to alter the manner in which money managers invest in agency MBS.
At JPMAM, client relationship teams are reaching out to our clients to address operational and legal requirements, where needed. Clients should feel free to reach out to their primary contact with any questions they may have regarding this.