December 19, 2017

Robert Ryan
Acting Deputy Director
Division of Conservatorship
Federal Housing Finance Agency
Office of Strategic Initiatives
400 7th Street, S.W.,
Washington, DC 20024

Re: SIFMA Comments on December 4, 2017 Update on the Single Security

Dear Mr. Ryan,

SIFMA1 is pleased to see FHFA publish additional discussion of the progress towards the development of the Common Securitization Platform and work to create a single form of MBS to be issued by the two GSEs. As you know this issue is a central focus for SIFMA’s members active in the Agency MBS market, and they have devoted significant time and energy over the last 5 or so years discussing and providing feedback to FHFA, the GSEs, and Treasury on various aspects of it.

The message we would like to convey in this letter is as follows: while we observe and appreciate the efforts that have been made to provide comfort to market participants that the introduction of a common TBA contract would be a net positive to the market, we do not believe that enough has been done, and also believe that time is running short to provide this comfort to the market if FHFA intends this effort to launch in mid-2019. This is particularly an issue around alignment of GSE activities and monitoring of performance, given how important it is to ensure that misalignment of performance does not occur in the first place, as opposed to trying to remedy it after it happens.

It is also imperative that the market, including investors, is ready to trade the product at launch. This implicates issues (discussed further below) related to changes to investment management agreements (IMAs) and vendor/system/IT work. Today there are uncertainties around tax and other regulatory treatment which need to be addressed for some of this work to move forward. In some cases these changes take significant time, and may be on a schedule outside of a fund manager’s control (e.g., a mutual fund board that meets once per year). We believe this merits action to move regulatory issues forward as expeditiously as possible, and a continuation of the focus on market readiness.

This effort represents a fundamental change to a $5 trillion market, where the consequences of a non-optimal implementation will have broad impact. In our view, there are no more important factors in the success or failure of single security than creating a durable and effective alignment of the GSEs’ activities, policies, and programs, and therefore the performance of their MBS, and ensuring that the market is prepared to trade that product. We do not believe market participants have a sufficient level of comfort with or belief in the durability of the current relatively equal prepayment performance of the GSEs’ MBS, and believe more work needs to be done to ensure readiness.

Below we address a few sections of the document published by FHFA on December 4th.2

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1 SIFMA is the voice of the U.S. securities industry. We represent the broker-dealers, banks and asset managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for businesses and municipalities in the U.S., serving clients with over $18.5 trillion in assets and managing more than $67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.

2 Available here: https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Updates-Progress-on-the-Single-Security-Initiative-and-CommonSecuritization-Platform.aspx