United States of America: Corporate Actions - Single Security Initiative by FHFA; Freddie Mac and Fannie Mae
Clearstream Banking1 informs customers of the Single Security Initiative starting
3 June 2019
between Freddie Mac MBS and Fannie Mae MBS to create a new mortgage-backed security (MBS) to be issued and guaranteed by either Freddie Mac or Fannie Mae and backed by fixed rate 30, 20 ,15 or 10 year single-family mortgage loans.
Currently, Fannie Mae MBS and Freddie Mac MBS are unique products that trade independently of each other in distinct To be announced (TBA) markets. The Single Security Initiative is designed to increase liquidity and fungibility in the USD.5 trillion TBA MBS market. The single security will create a single form of MBS through a new Common Securitization Platform (CSP) that will be consistent regardless of the issuer and is intended to be deliverable into the same TBA contract.
The optional exchange
Freddie Mac will provide holders of 45-day, TBA eligible and non-TBA eligible Participation Certificates (PCs) and Giants (multiple PCs) the option to exchange their eligible 45-day securities for 55-day Freddie Mac securities. To facilitate exchanges, Freddie Mac will create 55-day mirror securities on a one-for-one basis for all exchange-eligible 45-day PCs and Giants. The mirror securities will have a new CUSIP, prefix, pool number and issuance date. The 55-day security will ultimately be backed by the same loans the back the exchanged 45-day security.
Note: The 15-year securities that were backed 100% by 10-year collateral at their time of issuance will be mirrored as 10-year 55-day securities.
Freddie Mac will offer 10-day delay cash compensation payment for each exchange. An option-adjusted spread (OAS) valuation method, leveraging models from market analytics providers, will be used to determine the compensation rate. Freddie will publicly publish pricing grids on their Single Security website, to help investors prepare for the exchanges.
The exchange is considered as non-taxable.
Impact on customers
The voluntary exchange will start on 3 June 2019 and will run until the maturity of the instruments. If you are interested in exchanging your Fanny Mae eligible securities, you may be able to request the exchange reserve date up to two (2) weeks prior to the exchange day and at the latest, two days prior to the requested exchange date.
The exchange will be performed by having the holders deliver via settlement instructions their eligible 45-day Fannie Mae securities for 55-day Freddie Mac securities. Freddie Mac will offer two exchange methods:
- the “Direct-to Freddie Mac Exchange” method via Tradeweb or;
- Freddie Mac’s Dealer Direct
If you are interested in participating to the exchange through your Clearstream Banking account, you will be able to instruct your settlement instructions for the exchange if you choose the Freddie Mac’s Dealer Direct option for the exchange. You will have to instruct a Fedwire settlement delivery and a receipt against payment instruction to complete the exchange.
More details on the instruction formats and content required in your settlement instructions to be provided via Clearstream Banking will be announced as soon as this information becomes available.
Customers wanting to participate in the exchange should make themselves familiar with the information available on the Freddie Mac and Fannie Mae official websites and the conditions applicable to their portfolio or contact Clearstream Banking Customer Service or their Relationship Officer.
1. Clearstream Banking refers collectively to Clearstream Banking S.A., registered office at 42, avenue John F. Kennedy, L-1855 Luxembourg, and registered with the Luxembourg Trade and Companies Register under number B-9248, and Clearstream Banking AG (for Clearstream Banking AG customers using Creation Accounts), registered office at 61, Mergenthalerallee, 65760 Eschborn, Germany and registered in Register B of the Amtsgericht Frankfurt am Main, Germany under number HRB 7500.