Subject: File No. SR-FINRA-2015-036
From: Robert Tirschwell
Affiliation: Brean Capital, LLC

November 10, 2015

Mr. Robert W. Errett
Deputy Secretary
Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549-1090
Via email
Re: File Number SR-FINRA-2015-036


Mr. Errett,
I run the fixed income trading business here at Brean, and I am a partner in the firm. We are a firm that risks its own capital to make markets for its customers in less liquid Agency Mortgage Backed Securities. I want to add a few words to what my partner Robert Fine responded with earlier today.

The issue for us and other risk taking regional dealers with respect to updated RULE 4210 has much to do with a corollary beguilement…namely the MBSCC. Let me explain:

Many of our counterparties or their clearing agents or prime brokers net MBSCC. The MBSCC only nets tba and “good delivery” mortgage pools. But that barely comprises half universe of GNMA, FNMA, FGLMC Agency  pools.  GNMA reverse mortgages, and all Agency arm pools, and all non-deliverable 30yr and 15yr fixed-rate pools do not net. Nor do many 10yr pools net.  Regional dealers happen to trade a lot of non-netting pools, and therefore are very  much affected by the updated margin RULE.

If we do a trade on a non MBSCC netting pool, on a forward basis (greater than t+2), we usually do that trade on swap. One side nets (the tba), but on the non-MBSCC netting pool we are in a margin rapport with our other side.  If the market moves against us (above an pre-negotiated MSFTA threshold), we take excess net capital and send it to our other side.  But why are we doing all this sending-of-money at all?  Why are we sending money on some mortgage pools and not others? To us (and I’m sure we are not alone) the MBSCC clearing architecture is not equipped for the modern age of trading, whatever reasons they might give. They only net a percentage of the existing stock pile of tradeable pools. If they simply netted all mortgage pools then firms like ours would be able to use our excess net capital for what is actually intended  – as trading capacity for our customers, as opposed to being used to make up for and solve for the inadequacy of the MBSCC netting system.

To drive this point home, let me describe another way to think about this. Imagine, for a moment, that there was no netting facility (MBSCC) at all. Continue to imagine, in the face of no netting facility, FINRA proposed this very RULE change. Margin dollars flying all over the place on almost every regular way transaction, human hands touching and trying to track all these dollars and match them up with every trade, every firm taking precious excess net capital and sending it over here and over there and all over the world to back offices some of which don’t speak your language, and all that money they send out – although it counts toward good capital – erodes each firms ability to provide its fundamental market function; namely, to provide basic market liquidity to its customer. Now…imagine if in response, there was a solution provided: a netting facility created to handle only 50% of the FNMA/GNMA/FGLMC pools ever created. The market participants, the regulators, and even common sense would dictate that a solution is not really a solution is if solves only half the problem. Why create a solution which covers only 50% of the pools…when you can create a solution that covers 100% of the pools? Well, right now, that is PRECISELY the system we have.

Advancing this RULE change before the MBSCC netting architecture is updated is akin to transferring the onus of MBSCC functionality onto  dealers who job is to trade debt, not step in with their capital to subsidize the grave failure and desistance of MBSCC market accountability.

We therefore suggest, with great humility, that you use your sway to encourage MBSCC to update their netting architecture to include all the mortgage pools it doesn’t current net. In this way, the playing field will be level. Otherwise, the RULE discriminates against those whose limited excess net capital prohibits them from doing in the future, the business they do today…. as a result of poor and outdated MBSCC architecture. That a pool nets or doesn’t shouldn’t be the reason a trade doesn’t get done. This rule is unfriendly to regional dealers to the exact extent MBSCC does not first grow the pool base it nets.

I am, of course, willing to talk in more detail about this subject if the RULE making body deems that to be useful.

Yours Sincerely,

Robert Tirschwell
Head of Fixed Income Trading
MBS/ABS Trading
Brean Capital, LLC
1345 Avenue of the Americas
New York, NY   10105-0007