The following is a post made to the SiliconInvestor Website: The Epic American Credit and Bond Bubble Laboratory, Msg # 85257. If credible, this could really get scary. Also, I have posted below a section from the Fixed Income Clearing Corporation's Mortgage-Backed Securities Division which highlights part of the problem associated with clearings, trade comparisons, confirmations, nettings and other risk management issues. As the poster said: "As ugly as the markets are, behind the scenes the situation is even uglier"
From: Gemlaoshi 8/17/2007 10:12:24 AM
26 Recommendations of 85289
As ugly as the markets are, the behind the scenes situation is even uglier.
As I have posted here before, my daughter is a financial risk consultant with the consulting arm of one of the top accounting firms. Yesterday she received a call to get to GS as quickly as possible...it seem the derivatives settlement process is in danger of coming unglued.
Since most of these are poorly documented private contracts with counterparties, there are $billions at stake where they don't know the counterparty or if the CP is even still in business. This has made it impossible to ascertain their existing positions because so many of the "sells" in the last couple of months have not been settled, but are in limbo.
The NY Fed has been warning of this situation for the past several months...it seems like it is here in real life. My daughter has been told to expect to be at GS through the end of the year...the mess is HUGE.
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About The Mortgage-Backed Securities Division
The Mortgage-Backed Securities Division operates two primary business units that serve the MBS marketplace: clearing services, which include trade comparison, confirmation, netting and risk management and Electronic Pool Notification (EPN), which allows customers to transmit/retrieve MBS pool information in real-time utilizing standard message formats.
Stability: A Unique Securities Market
The MBS market bears unique characteristics that affect how trades are compared and settled, and how industry participants communicate with each other. Our services and systems are driven by such distinctive market fundamentals as:
- Long settlement periods -- The average time between an MBS trade and settlement date is far longer than that in the Government securities and equity markets -- 45 to 90 days compared to one and three days, respectively. This extended settlement process greatly increases participants' exposure to price fluctuations in the MBS market.
- High transaction values -- While the number of transactions completed in the MBS market is smaller than that in other markets, an average MBS trade is significantly larger in size -- typically $10 million in par value or more. This increases the potential financial exposure and requires a sophisticated and proactive risk management approach.
- Variance upon delivery -- A seller in the MBS market is permitted to deliver securities that vary by a certain percentage from the originally traded face value. This variance creates post-trading profit opportunities and requires sophisticated accounting systems to track settlement activity.
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