What Is the Fixed Income Clearing Corporation (FICC)?
The term Fixed Income Clearing Corporation (FICC) refers to a regulatory clearing agency that deals with the confirmation, settlement, and delivery of fixed-income assets in the U.S. The agency was established in 2003 as a subsidiary of the Depository Trust & Clearing Corporation (DTCC). It ensures the systematic and efficient settlement and clearing of U.S. government securities and mortgage-backed security (MBS) transactions in the market.
- The Fixed Income Clearing Corporation is a clearinghouse for certain fixed-income securities traded in the U.S.
- The agency functions as a subsidiary of the Depository Trust and Clearing Corporation.
- The FICC was established in 2003 as a result of the merger of the Government Securities Clearing Corporation and the Mortgage-Backed Security Clearing Corporation.
- The primary goal of the FICC is to ensure that government securities and mortgage-backed securities are settled efficiently and systematically.
- The FICC's two main divisions are the Government Securities Division and the Mortgage-Backed Securities Division.
Understanding the Fixed Income Clearing Corporation (FICC)
The Depository Trust and Clearing Corporation is a financial services company. Established in 1999, it brought together the functions of two other organizations, the Depository Trust Company and the National Securities Clearing Corporation. The goal of the DTCC is to provide clearing and settlement services for the financial market.
As noted above, the FICC was established as a subsidiary of the DTCC in 2003. It was created as a result of the merger between the Government Securities Clearing Corporation (GSCC) and the Mortgage-Backed Security Clearing Corporation. The agency is registered with and regulated by the U.S. Securities and Exchange Commission (SEC).
The role of the agency is to ensure that U.S. government-backed securities and MBS are systematically and efficiently settled. For instance, Treasury notes and bonds settle on a T+1 basis. To ensure that trades are settled consistently and efficiently, the FICC employs the services of its two clearing banks: the Bank of New York Mellon and JPMorgan Chase Bank.
According to the SEC, the FICC is the only agency that acts as a clearinghouse for U.S. government securities transactions. As such, it "substitutes itself for both sides of every transaction that it clears, guaranteeing those transactions and making itself the buyer for every seller and the seller for every buyer."
In October 2021, the SEC announced it fined the FICC $8 million for failing to manage risk in its Government Securities Division. The SEC stated that the division lacked the appropriate risk management policies between April 2017 and November 2018. The SEC also found that the FICC didn't comply with industry rules that required it to put policies and procedures in place relating to the review of its margin coverage between 2015 and 2016.
Fixed Income Clearing Corporation (FICC) Structure
The FICC is divided into two sections: the Government Securities Division (GSD) and the Mortgage-Backed Securities Division (MBSD). We've highlighted some of the most important information about both below.
Government Securities Division (GSD)
The GSD is responsible for handling new fixed-income issues and reselling government securities. The division provides netting for trades in U.S. government debt issues, including repurchase agreements (repos) or reverse repurchase agreement transactions (reverse repos).
Securities transactions processed by the FICC's GDS include Treasury bills, bonds, notes, zero-coupon securities, government agency securities, and inflation-indexed securities. The GSD provides real-time trade matching through an interactive platform that collects and matches securities trades, enabling participants to monitor the status of their trades in real-time.
Mortgage-Backed Securities Division (MBSD)
The MBS division of the FICC provides real-time automated and trade matching, trade confirmation, risk management, netting, and electronic pool notification to the MBS market.
Through the RTTM service, the MBSD immediately confirms trade executions in a legal and binding manner. A trade is deemed compared by the MBSD at the point in time at which the division makes available to the members on both sides of a transaction output indicating that their trade data have been compared. A trade compared by the MBSD constitutes a valid and binding contract, and trade settlements are guaranteed by the MBSD at the point of comparison.
Key participants in the MBS market are mortgage originators, government-sponsored enterprises, registered broker-dealers, institutional investors, investment managers, mutual funds, commercial banks, insurance companies, and other financial institutions.