Growing pressures to enhance risk management and streamline mortgage-backed securities post-trade processing are forcing firms to consider alternative methods to achieve MBS Novation readiness. Broker-dealers are turning to third-party solutions as the preferred alternative for fixed income firms to become MBS Novation ready.

1. MBS Novation:
The path to modernization of
a $100 trillion trading market

2. MBS NOVATION: THE PATH TO MODERNIZATION OF A $100 TRILLION TRADING MARKET | EXECUTIVE SUMMARY
EXECUTIVE SUMMARY
The mortgage-backed securities (MBS) market has grown
to more than US $100 trillion per year in trading volumes.
In addition to the increasing volumes (see Exhibit 1 below),
pressures have grown to modernize and streamline the complex
post-trade process, in part due to repercussions of 2008’s
MBS market turmoil. Today, the path to a modernized central
counterparty (CCP) platform has been clearly defined for the
securities industry.
MBS Novation is the culmination of years of work by the Fixed Income Clearing Corporation (FICC) to
modernize the MBS post-trade life cycle under a CCP model. After transition steps are completed, MBS
Novation system testing is scheduled to commence in June of 2014, with industry roll-out in early 2015.
It will bring daily netting to the “To Be Announced” (TBA) market, while inserting the FICC as the central
counterparty for each trade. This will result in increased efficiencies to the market by streamlining
settlements as well as reducing systemic and operational risk for financial institutions.
To date, many firms have managed MBS TBA trade processing through proprietary technologies.
However, firms moving to MBS Novation using legacy, in-house systems will have multiple migration
challenges due to budget constraints, internal resources and a limited time frame. The clock is ticking
toward a 2014 testing date, with significant transition steps to manage in the interim. These combined
pressures are forcing firms to consider an alternative way to achieve MBS Novation readiness —
by leveraging a third-party solution offered by a firm with deep experience in the MBS market and
expertise in FICC CCP initiatives.
MBS Novation is the
culmination of years
of work by the FICC to
modernize the MBS
post-trade life cycle
under a CCP model.
EXHIBIT 1
MBS Yearly Par Volume Traded (2001 – 2012)
Source: TABB Group
MBS Yearly Par Volume Traded (USD T’s)
120
100
80
60
40
20
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

3. 2
MBS NOVATION: THE PATH TO MODERNIZATION OF A $100 TRILLION TRADING MARKET
The Move to MBS Novation
The transition to MBS Novation has been fostered
by the need to streamline the historically complex
MBS post-trade process. The two most common
ways to trade Agency MBS securities are in
the TBA and Specified Pool markets, with TBA
processing following a long and complicated life
cycle (See the chart below for MBS Trade Types).
MBS TRADE TYPE DESCRIPTION
TBA In a TBA trade, the seller and buyer agree to the type of security, coupon,
face value, price and settlement date at the time of the trade, but do
not specify the actual securities which will be settled. Two days before
settlement, the seller determines the cheapest securities to satisfy the
commitment and notifies the buyer of the specific pools that will be
delivered.
Specified Pool Unlike TBA trading, at the time a specified pool trade is executed the
buyer knows exactly which pool will be delivered. In most cases, the buyer
is willing to pay up to receive pools with desired characteristics.
TBA trades settle on a monthly basis, with each
type of MBS product having a unique notification
and settlement date selected by the Securities
Industry and Financial Markets Association
(SIFMA). The gap between trade and settlement
date could therefore be as short as two days or as
long as 60 days. Each notification date creates a
flurry of activity as trade counterparties transmit
notifications specifying the securities they plan
to deliver. The sheer cost of labor involved in
the lengthy and time-consuming TBA allocation
process has driven the need to modernize.
The Lehman Brothers bankruptcy in September
of 2008, requiring winding down $328 billion of
outstanding MBS trades, provided additional
impetus for change. In the aftermath of a financial
crisis, in which banks collectively lost more than $9
billion due to write-downs in Q4 2008 alone, fixed
income businesses have come under increasing
pressure to streamline operations, enhance risk
management and increase transparency for
counterparty exposure. At the time, these needs
clashed with a period of financial austerity, when
industry profit margins were being squeezed and
technology budgets were being cut.

4. 3
MBS NOVATION: THE PATH TO MODERNIZATION OF A $100 TRILLION TRADING MARKET
MBS Novation’s
daily TBA netting
will result in reduced
settlements and
enhanced risk
management.
The Benefits of MBS Novation
MBS Novation will bring the full scope of CCP
services to fruition. Through the combination
of daily TBA and Pool Netting, FICC will become a
true CCP, resulting in the processing of all
MBS trades through a unified and coordinated
flow, from trade match through settlement.
See Exhibit 3 for a depiction of the FICC’s plans,
which include deploying additional services,
including fail netting.
Operational efficiencies and risk management
benefits with MBS Novation:
• Reduced counterparty risk
• FICC harmonized mark-to-market processing
limits exposure
• Improved capital allocation and balance sheet
usage
• Reduction in trades requiring allocation and
settlement
• Fail netting will further streamline settlements
Simplifying
Implementation Utilizing
a Third-Party Solution
Provider
MBS Novation will be the largest and most
complex of all CCP phases implemented for the
MBS market. In 2014, the FICC expects to make
system testing available for all participants. In
preparation, sell-side firms will need to have their
allocation processing systems configured and
updated in accordance with new requirements.
Sell-side implementation options are twofold —
either upgrading a legacy system or leveraging a
third-party vendor with a proven track record in
MBS CCP implementation.
The Path to MBS Novation
In April of 2012, the FICC launched its CCP for MBS
— the first new CCP to be launched in the US cash
market in a quarter of a century. In addition, it is
the only CCP to receive regulatory approval from
the Securities and Exchange Commission (SEC)
for MBS trading. By guaranteeing settlement of all
matched MBS trades, FICC took an important step
toward implementing the MBS Novation program
as the culmination of a multi-step initiative. (See
Exhibit 2 for a timeline).
EXHIBIT 2
Timeline for MBS Novation
June 2007 March 2008 Sept. 2011 March 2012 April 2012 June 2014
CCP1
Real time trade
matching (RTTM)
of specified
pool trades
improving the
MBS matching
process
CCP2
Pool substitution
functionality
in addition to
Electronic Pool
Notification
(EPN)
SPT1
Factor updates
to specified
pool trades and
Notification
of Settlement
(NOS)
submissions
SPT2
RTTM for
broker-specified
pool trades and
subsequent give-
up process
CCP3
Pool Netting
and explicit
guarantee of
settlement by
FICC
MBS Novation
Daily TBA
netting will
result in reduced
settlements and
enhanced risk
management

5. 4
MBS NOVATION: THE PATH TO MODERNIZATION OF A $100 TRILLION TRADING MARKET
EXHIBIT 3
The MBS Post-Trade Lifecycle Incorporating MBS Novation
Source: TABB Group
SellerBuyer
Contractual Settlement Day
Delivery vs. Payment Settlement
CSD
Trade Execution
Matching & Novation
Daily end-of-day TBA Netting
TRADEDATE
“48-Hour Day”
Pool Allocation
Pool Comparison
CSD-2
“24-Hour Day” Pool Netting
CSD-1
Buyer SellerSeller Buyer
FICC RTTM: Trades are submitted to RTTM, and matched and novated
FICC Netting: FICC runs TBA
Netting on matched TBA trades
and generates net TBA obligations
FICC Electronic Pool Notification
FICC RTTM: Members may submit pool information
to RTTM (but not required to). EPN will submit the
allocations to Pool Netting real-time.
TBA
Trade
Trade-
for-Trade
SellerBuyer
FICC @ Settlement Bank
Pools
Trade-for-Trade
Obligations
TBA Obligations
FICC Netting: FICC runs Pool Netting and generates obligations
to settle versus FICC. The net begins after Fedwire closes.
Pools to be settled vs. FICC
Pools
$ $

6. 5
MBS NOVATION: THE PATH TO MODERNIZATION OF A $100 TRILLION TRADING MARKET
TABB further estimates that 20% of the
industry’s MBS technology spend will go towards
development, with the remaining 80% allocated
to maintenance of existing systems. The need
for integrated technology has never been
greater, with firms across the industry allocating
increasing levels of resources to support
technology efforts. In the current cost-sensitive
environment, firms face increasing pressures to
manage technology and development expenses
efficiently.
A number of sell-side firms continue to operate
proprietary systems, and they typically implement
innovations such as MBS Novation by adding new
functionality on top of legacy systems. This often
is a complex and expensive endeavor, especially
in terms of finding expertise and allocating
in-house labor. Legacy system upgrades must
typically work around “band aids” from previous
enhancements, increasing complications and
As firms prepare for MBS Novation, the TABB
Group projects that sell-side MBS technology
spend will reach $165.5 million in 2013 (See Exhibit
4). In 2014, MBS related technology costs will
continue to rise as more firms roll out MBS
Novation solutions. Estimates of the cost to
upgrade and refit stand-alone systems range from
$2.0 million to $3.0 million per firm.
According to the
TABB Group, sell-side
IT spend for MBS
trade processing is
projected to reach
over $200MM in 2014
as firms prepare for
MBS Novation.
expanding resource requirements. The costs of
in-house development and system maintenance
will only rise with the need to prepare for MBS
Novation.
To counter the pressures involved in upgrading
legacy systems, many sell-side firms are
discovering the benefits of leveraging a third-
party solution that is MBS Novation-ready.
TABB Group research shows that the balance of
external vs. internal technology spending on MBS
Novation initiatives by sell-side firms is 56% and
44%, respectively (Exhibit 5). This demonstrates
growing acceptance by financial firms for external
solutions to address complex, time-sensitive
industry developments.
Using a third-party system allows firms to share in
the cost of industry initiatives, rather than footing
the bill for 100% of internal development plus
annual maintenance. Outsourcing and third-party
systems also offer an optimal solution for dealing
with situations in which industry best-practices
emerge, or when specific business needs or
regulatory changes require a rapid response.
TABB further
estimates that 20%
of the industry’s
MBS technology
spend will go towards
development, with
the remaining
80% allocated to
maintenance of
existing systems.
EXHIBIT 4
Sell-Side MBS Allocation IT Spend (2010-2015)
Source: TABB Group
*Projected Figures
153
250
200
150
100
50
0
2010 2011 2012 2013* 2014* 2015*
156.4 160.0 165.4
200.2
242.3
EXHIBIT 5
2013 Sell-Side IT Spend on MBS
Allocation (2013)
Source: TABB Group
$164.5 M Sell-Side IT Spend on MBS Allocation for 2013
56% 44%
External Spend Internal Spend

7. 6
MBS NOVATION: THE PATH TO MODERNIZATION OF A $100 TRILLION TRADING MARKET
Conclusion
MBS Novation represents a significant step
forward for the MBS industry. It will be a major
improvement to risk management and increase
operational efficiencies by reducing settlements
and fails. At the same time, the rapidly
approaching implementation of MBS Novation
poses significant demands on individual firms,
especially in regard to allocating technology
resources and meeting budget constraints.
Third-party solutions are emerging as the
preferred alternative for meeting mortgage-
backed securities’ evolving industry and
regulatory changes, such as MBS Novation—
both on time and on-budget. However, not all
third-party providers can offer the size, scale and
experience to master this complex $100 trillion
market. Make sure you ask the right questions
and thoroughly evaluate vendors before making
this critical strategy choice.
Broadridge offers a proven track record
in delivering timely, efficient FICC
client solutions.

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Author Information
Matthew Connor, General Manager
Broadridge Mortgage Backed Solutions
Broadridge Financial Solutions
Mathew.Connor@broadridge.com
Mark Best, Director
Broadridge Mortgage Backed Solutions
Broadridge Financial Solutions
Mark.Best@broadridge.com
Michael Acevedo, Product Manager
Broadridge Mortgage Backed Solutions
Broadridge Financial Solutions
Michael.Acevedo@broadridge.com