What Is the Fixed Income Clearing Corporation (FICC)?
Let me explain what the Fixed Income Clearing Corporation, or FICC, really is. It's a regulatory clearing agency that handles the confirmation, settlement, and delivery of fixed-income assets in the U.S. Established in 2003 as a subsidiary of the Depository Trust & Clearing Corporation (DTCC), the FICC ensures that transactions in U.S. government securities and mortgage-backed securities (MBS) are settled systematically and efficiently.
Key Takeaways
- The Fixed Income Clearing Corporation serves as a clearinghouse for specific fixed-income securities traded in the U.S.
- It functions as a subsidiary of the Depository Trust and Clearing Corporation.
- The FICC was created in 2003 from the merger of the Government Securities Clearing Corporation and the Mortgage-Backed Security Clearing Corporation.
- Its main objective is to guarantee efficient and systematic settlement of government securities and mortgage-backed securities.
- The FICC operates through two primary divisions: the Government Securities Division and the Mortgage-Backed Securities Division.
Understanding the Fixed Income Clearing Corporation (FICC)
You should know that the Depository Trust and Clearing Corporation, or DTCC, is a financial services company founded in 1999. It combined the roles of the Depository Trust Company and the National Securities Clearing Corporation to offer clearing and settlement services for the financial markets.
As I mentioned, the FICC came into existence in 2003 as a DTCC subsidiary, resulting from the merger of the Government Securities Clearing Corporation (GSCC) and the Mortgage-Backed Security Clearing Corporation. It's registered with and regulated by the U.S. Securities and Exchange Commission (SEC).
The FICC's core function is to make sure U.S. government-backed securities and MBS are settled in a systematic and efficient way. For example, Treasury notes and bonds settle on a T+1 basis. To keep trades consistent and efficient, the FICC uses two clearing banks: the Bank of New York Mellon and JPMorgan Chase Bank.
Here's a fast fact for you: According to the SEC, the FICC is the sole clearinghouse for U.S. government securities transactions. It steps in for both sides of every cleared transaction, guaranteeing them by becoming the buyer for every seller and the seller for every buyer.
Special Considerations
I need to point out that in October 2021, the SEC fined the FICC $8 million for not properly managing risk in its Government Securities Division. The SEC noted that from April 2017 to November 2018, the division didn't have the right risk management policies in place. Additionally, the FICC failed to follow industry rules requiring policies and procedures for reviewing its margin coverage between 2015 and 2016.
Fixed Income Clearing Corporation (FICC) Structure
The FICC is structured into two main sections: the Government Securities Division (GSD) and the Mortgage-Backed Securities Division (MBSD). I'll cover the key details about each below.
Government Securities Division (GSD)
The GSD takes care of new fixed-income issues and the resale of government securities. It handles netting for trades in U.S. government debt, including repurchase agreements (repos) and reverse repurchase agreements (reverse repos).
Transactions processed here include Treasury bills, bonds, notes, zero-coupon securities, government agency securities, and inflation-indexed securities. The GSD offers real-time trade matching via an interactive platform that collects and matches trades, allowing you to monitor your trade status in real-time.
Mortgage-Backed Securities Division (MBSD)
The MBSD provides real-time automated trade matching, confirmation, risk management, netting, and electronic pool notification for the MBS market.
Using the RTTM service, the MBSD confirms trade executions immediately in a legally binding way. A trade is considered compared when the division provides output to both sides showing the data matches. At that point, it becomes a valid contract, and the MBSD guarantees settlement.
Key players in the MBS market include mortgage originators, government-sponsored enterprises, registered broker-dealers, institutional investors, investment managers, mutual funds, commercial banks, insurance companies, and other financial institutions.
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