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Case Studies

Potomac Point Group has expertise in business transformation, change management, and business process improvement. Our consultants work alongside banks and government-sponsored enterprises to help them overcome challenges in the mortgage finance industry.

Implementing the largest change in the history of the MBS Market

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Challenge

In response to a regulatory directive, Potomac Point Group was engaged by Freddie Mac to facilitate collaboration with Fannie Mae, FHFA, and other market participants to drive the design, implementation, and adoption of a common Uniform Mortgage-Backed Security (“UMBS”). The UMBS was required to have matching features across both issuing entities, including a 55-day payment delay, standard pooling rules, and aligned disclosures.

Solution

PPG worked with the client to develop the design of the UMBS, assist with the internal implementation of the UMBS in supporting processes and systems, and ensure successful market adoption.

Design

Collaborated with the Freddie Mac, Fannie Mae, FHFA and industry stakeholders to develop the characteristics of the new security
Worked with Client’s Policy group to develop the new disclosure specifications and with leading market participants (data vendors, Federal Reserve, and investors) to deploy
Helped design the Freddie Mac Gold PC exchange program which enabled holders to exchange their 45-day Gold PCs for 55-day UMBS

Implementation

Coordinated internal operational readiness and change management across multiple workstreams
Led the internal requirements development for new security products associated with the UMBS: 55-day security, 10-year security, and commingled resecuritizations
Led the efforts to convince the Fed to modify several fundamental tenets of their securities platform to enable payment on commingled resecuritizations
Managed the implementation of the exchange process which required collaboration with internal operations, investors, broker-dealers, custodians, and third-party providers

Adoption

Authored the Single Security Market Adoption Playbook—an industry guide to help market participants prepare for the changes associated with the UMBS
Worked with tri-party team to drive communication with the investment community, including: the facilitation of multiple industry table-top exercises, coordinating various industry working group sessions, and developing materials for stakeholder meetings and industry conferences
Helped develop framework to track and report on external stakeholder readiness

Outcome

As a result of this multi-year effort our client and their industry partners:

Successfully implemented the largest change in the history of the MBS market

Fulfilled their regulatory requirement on time and with minimal market disruption

Created an even more liquid ~$3.5T TBA market

Program management of major Mortgage-Backed Securities exchange initiative

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Summary

Freddie Mac engaged the Potomac Point Group team to provide investors the option to exchange their Gold PCs for the new UMBS. Freddie Mac needed to implement a process to allow holders of Gold PCs with a 45-day payment delay to exchange them for an equal share of a new 55-day delay UMBS, plus compensation for the additional 10 days payment delay. To facilitate this exchange, Freddie Mac had to design a new process, deploy new technology, create “mirror” securities for all exchange-eligible securities, and roll it out to the market.

Solution

We formed a team of consultants to help design and implement the security exchange program in four major areas:

Exchange Process Design and Development
- Worked with client business, technology, and other consulting teams to develop and document a process that enabled authorized dealers to submit exchange requests on behalf of their investors
- Provided program management for implementation of Dealer Direct portal to facilitate the exchange process

Creation of second “Direct-to-Investor” Exchange path (via Tradeweb)
- In response to investor feedback, helped develop a second, direct-to-investor exchange path leveraging the Tradeweb trading platform
- Developed and documented new business processes for this path, including a comprehensive KYC process for incoming investors
- Managed the implementation of the direct-to-investor path, which was completed within a six-month timeframe

Mirror Security Issuance
- Wrote the business requirements for the issuance of over 70,000 mirror securities – these 55-day “mirrors” of all exchange-eligible securities were issued in advance to facilitate a fast, smooth exchange process
- Negotiated with industry business partners, including the Federal Reserve and downstream organizations that consume the Federal Reserve’s broadcast, to determine feasibility requirements for the mirror issuance
- Collaborated with our client’s securities operations team and the Federal Reserve to develop the holding account structure for the mirror securities

Investor Adoption
- Coordinated outreach calls and meetings to educate investors on the two exchange paths, including the operational and tax implications of each
- Conducted on-boarding calls with first-time exchanging investors to streamline their exchange transactions and verify their wire instructions and account setup
- Communicated directly with dealers, custodians, and other key industry stakeholders to ensure consistent adoption (e.g., standard messaging formats) and to verify that their systems were ready to accept and process exchanges

Outcome

In collaboration with our team, Freddie Mac was able to effectively design an exchange process and infrastructure, and seamlessly roll out the program to all investors in the Agency MBS market. As a result, Freddie Mac:

Successfully implemented both exchange paths one month prior to Single Security go-live

$7tn

Successfully issued over 70,000 mirror securities with approximately $7 trillion in par value months ahead of the launch

Has conducted approximately 40,000 exchanges representing $250B in security UPB as of November 21, 2019