Risk Management Manual of Examination Policies - FDIC

SECURITIES AND DERIVATIVES Section 3.3
trade on organized exchanges. In such circumstances, the
Capital Markets Branch’s sources provide estimated prices
that have been derived from valuation models. These
estimated prices are indications of value, not precise
purchase or sale prices. Credit ratings are obtained from
several of the NRSROs.
Historical interest rates are provided in the Market Index
and Rate Application (MIRA). MIRA contains a ten-year
database of rates, current forward rates, summary reports,
yield curves, and an index comparison analysis feature.
MIRA is an automated Excel template which examiners
may download from the Capital Markets Branch’s FDICnet
site.
Mortgage prepayment forecasts and derivative market
summaries are provided in a simple spreadsheet format and
may be downloaded from the Capital Markets Branch’s
FDICnet site.
Other information, including detailed analytics and
financial information for debt and equity issuers, may be
requested on an individual basis. In addition, examiners
may contact the Capital Markets Branch for guidance on
examination procedures, supervisory policy, and Report of
Examination treatment. Examiners should coordinate
those requests with a Senior Capital Markets and Securities
Specialist in their assigned regional office before
contacting the Capital Markets Branch.
Settlement Practices, Confirmation and
Delivery Requirements, and Delivery
Documentation
Settlement Practices
Inadequate understanding of standard settlement practices
coupled with poor internal controls can result in
unnecessary costs or losses.
U.S. Treasury and Agency securities normally settle the
next full business day after the trade date. Transactions
involving U. S. Treasury and Agency obligations are
typically in book-entry form, rather than in physical
certificate form. Book-entry is an electronic registration,
transfer, and settlement system that enables the rapid and
accurate registration and transfer of securities with
concurrent cash settlement. Book-entry reduces handling
costs and quickens transaction completion. U. S. Treasury
and Agency book-entry securities are delivered and cleared
over the Federal Reserve Wire System (Fedwire) on a
delivery versus payment basis. Acceptance of the security
automatically debits the payment amount from the buyer's
account and credits it to the seller's account. The payment
and securities involved are transferred over the Fedwire
system. The Federal Reserve Bank of New York maintains
the book-entry custody system. All depository banks are
eligible to maintain book-entry accounts at their local
Reserve bank, provided that they also maintain a funds
account with their Reserve bank.
Corporate and municipal bonds normally settle three full
business days after the date of the transaction. The
Municipal Securities Rulemaking Board Rule G-15
established guidelines for the settlement of municipal
securities transactions. Corporate and municipal debt
securities are available in book-entry and registered,
definitive form. Book-entry corporate and municipal
bonds settle through the Depository Trust Company
(DTC). Members effect securities deliveries through DTC
via computerized bookkeeping entries.
Mortgage securities settlement procedures are more
complex than those for government, corporate, and
municipal bonds. The Bond Market Association
developed the "Uniform Practices for the Clearance and
Settlement of Mortgage-Backed Securities and Other
Related Securities" (Uniform Practices) to establish
industry standards for mortgage securities settlements.
Since the Uniform Practices are updated frequently, banks
engaged in mortgage and asset-backed securities
transactions should keep abreast of current settlement
standards. The current Uniform Practices are summarized
in the following paragraphs.
Government National Mortgage Association (GNMA)
guaranteed mortgage pass-through securities are available
in book-entry and definitive form. While most GNMA
securities have been converted to book-entry, some
physical certificates still exist. Book-entry GNMA
securities settle through the Participants Trust Company
(PTC) MBS Depository.
The Federal National Mortgage Association (FNMA) and
Federal Home Loan Mortgage Corporation (FHLMC) both
issue Real Estate Mortgage Investment Conduits
(REMICs) and mortgage pass-through securities. Since
1985, these securities have been issued in book-entry form
only. Nearly all of the agency's securities that were issued
in definitive, registered form before 1985 have been
converted to book-entry. Book-entries are transferred,
delivered, and settled through the Fedwire system.
Private label CMOs/REMICs (those issued by an entity
other than FNMA and FHLMC) and asset backed
securities (ABSs) are available in book-entry and
registered, definitive form. Book-entry private label
CMOs/REMICs and ABSs settle through the DTC. Private
DSC Risk Management Manual of Examination Policies 3.3-17 Securities and Derivatives (12-04)
Federal Deposit Insurance Corporation