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Retirement Planning > Social Security

Clearing Firm May Penalize Writers Of Offbeat CMOs

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The Depository Trust & Clearing Corp. may charge higher processing fees for underwriters that issue hard-to-process collateralized mortgage obligations and asset-backed securities.

The DTCC, New York, has published that idea in a new analysis of strategies for automating the processing of CMOs, ABS and other “structured securities.”

Some of the major issuers of CMOs are insurers, according to the DTCC.

The DTCC runs processing systems that financial services firms use to complete transactions involving many different types of financial products, including stocks, bonds and structured securities.

Today, because of difficulties with obtaining and exchanging principal and interest rate information, financial services companies get out much of the information late, and they often have to make adjustments after sending out incorrect P&I payments, officials from the DTCC and other organizations write in the structured securities processing analysis.

The authors of the structured securities analysis recommend improving automation of structured securities processing by extending the deadline for submission of payment information on structured securities, and by distributing a new “paying agent report card.”

The report card would track the performance of the largest structured securities paying agents, according to the authors of the analysis.

Another recommendation is for the DTCC and its Depository Trust Company unit to shorten the deadline for receiving rate information to one business day before the “payable” date, from two days today, and to push the 7 p.m. cutoff back to 11:30 p.m.

But the authors also recommend separating structured securities into a “conforming” and a “non-conforming” class.

The DTCC’s Depository Trust Company unit should charge an “exception processing fee” for non-conforming structured securities, the authors of the review propose.

The DTC would have to get approval for the non-conforming structured securities fee from the DTC board and the U.S. Securities and Exchange Commission, according to the DTCC.

The underwriters might not like the idea of paying the non-conforming fee, but there is an “overall lack of consistent, industry-wide awareness of the magnitude and severity of structured securities principal and interest processing problems” and “disproportionate displeasure and frustration felt by certain parties” in the structured securities market, DTCC officials say.

Today, some structured securities are structured in such a way that the paying agents appear to have no practical way to report rate information on time, officials say.

The DTCC believes the underwriters ought to pay any extra fees because the underwriters are responsible for coming out with issues that are difficult to process, officials say.


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