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Standard Forms / Documentation / Guidelines

Revised MBS Buy-In Procedures

The Association has published revised recommended procedures for mortgage-backed securities (MBS) buy-ins that are effective as of July 5, 2006. Buy-in procedures are used by broker-dealers to clean up “fails,” or securities that are not delivered by customers by the settlement date of a trade.  Association members have worked together to produce these guidelines over the last two years in order to meet the requirements of existing Treasury Regulations and to incorporate lessons learned during the historic levels of fails the industry experienced in 2003.  A key element of the revised procedures is that they address the effects of amortization of the underlying mortgage pools in determining the settlement amounts of securities to be bought in, with different procedures for specified pools and to-be-announced, or TBA, transactions where specific pool information is not known until two days prior to settlement.  In addition, the Association worked with Bloomberg to create a new screen on its system which streamlines calculations and makes it easier for broker-dealers to implement the guidelines.

When a broker-dealer and a customer enter into a trade and one party does not deliver the traded security by the settlement date, it is known as a “fail.”  If a customer has still not delivered the securities to the broker-dealer sixty days after the settlement date, buy-in rules issued by the U.S. Treasury require broker-dealers to obtain securities of like kind and quality.  One way of doing this is for the broker-dealer to buy the securities in the market for the account of the customer.  If the amount paid by the dealer to acquire the securities in executing the buy-in exceeds the original settlement amount, the customer will be required to pay the difference.  The Association’s MBS buy-in procedures provide recommendations on how to calculate the money that is owed.

It is important to note that because Treasury’s buy-in rule only applies to broker-dealers, a buy-in may only be initiated by a broker-dealer, although customers may retransmit a buy-in notice to another party in certain circumstances.

An outline of changes from previous buy in procedures is available here.

The revised procedures are available here.

A walkthrough of the revised procedures is available here.

For more information please contact Robbin Conner or Chris Killian at 646-637-9200.