Trading Settlement And Clearing Procedures For Agency

Jeffrey D. Biby

Managing Director Lehman Brothers Inc.

Srinivas Modukuri

Senior Vice President Lehman Brothers Inc.

Brian Hargrave Vice President Lehman Brothers Inc.

Investors new to agency mortgage-backed securities (MBS) quickly learn that they offer return and risk characteristics that are unlike other fixed income investments. These differences arise because MBS are collateralized by residential mortgages and because the homeowner has the option to prepay at any time.

The features of agency MBS have led to specialized trading practices and back office procedures unlike those of the government and corporate bond markets. These procedures have evolved to ensure smooth-running and liquid markets, although they may seem somewhat arbitrary to investors new to the MBS market. This chapter focuses on the basics of how agency pass-through securities trade, settle, and clear—and why.

Borrowing Basics

Borrowing Basics

Some small business persons cannot understand why a lending institution refused to lend them money. Others have no trouble getting funds, but they are surprised to find strings attached to their loans.

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