Due to a recent system crash of the electronic pool notification system for mortgage-backed securities, the Bond Market Association has adopted a contingency guideline to extend the pool notification timeframe should a system error occur in the future.

The new protocol would extend the cut-off time for notification of pool settlements from 3 p.m. to 6 p.m. in the event that the EPN system experiences an unrecoverable problem before noon, or if the system encounters a problem between noon and 3 p.m.

According to George Miller, vice president and general counsel for the association, the extension would "give people in the markets more time to sort out what they need to do and deliver the information, reverting back to the old technology, creating some order and predictability in the market."

The EPN system was introduced approximately six years ago by the Mortgage Backed Securities Clearing Corp. - the sole provider of automated post-trade comparison, netting, risk management and pool notification services to the mortgage-backed securities market - in an attempt to create a revolutionary communication system between buyers and sellers.

Miller noted that since the introduction of EPN, the market has experienced "vastly reduced failed volumes and vastly improved communication of pool information which has led to more efficient and less costly settlements." The Sept. 13 system crash occurred at 2:58 p.m., and was the first major system-wide disruption since the EPN's inception.

"It sort of revealed a weakness in the industry, which was once that happened, it really was not clear what someone attempting to deliver pool information through that system was supposed to do," Miller added. This he described as the motivating factor in creating the extension guideline.

EPN, over the past few years, has become instrumental in the settlement process, and many market participants have become reliant upon it. "Our members believed it particularly important to have a guideline like that in place to just be protected in the event that the event should occur in the future," Miller said.

While this was the first major problem with the EPN system, the association does not anticipate any major problems in the future, and adopted the guideline accordingly.

"I think people believe it's highly unlikely that something like that will ever happen again. But in the event that it ever should, people in the industry and our members in particular, wanted to have in place a guideline that would kick in and take effect immediately upon the occurrence of another one of these disruptions," said Miller.

The MBSCC supported the association's decision. "We view the Bond Market Association's prompt action as truly in recognition of the dependency that has occurred primarily in the last 16 months on EPN by the industry, including the institutional side of the market," said Lynn Douglas, chief operating officer for the MBSCC.

Bug Fixed Promptly

For the extension to be enacted, the MBSCC must first notify the association that a problem with the EPN system has occurred. Upon receiving the information, the association has set up an internal procedure that will immediately get a notification out as broadly as it can through more traditional methods of communication such as telephone and fax, and via the association's Web site.

Because the disruption occurred during an "A-day" notification period, the MBSCC had promptly recovered the system within 48 minutes, and a fix was put into place within 24 hours, Douglas said. The EPN disruption was attributed to a minor glitch that had been in the system since the beginning and had been waiting for certain conditions to surface that would cause the system to be disrupted, she added.

The association believed that the situation was handled well. "The MBSCC responded very rapidly to address and correct that deficiency going forward," said Miller.

However, because of the nature of the matter at hand, the Association adopted the new guideline without conducting a more traditional, thorough analysis. This analysis usually consists of creating new guidelines with other constituencies that rely on, or are affected by, the guidelines the association puts forth.

These constituencies include mortgage originators, investors and asset managers, and the Association does encourage their input.

"We welcome their input and want to discuss with them whether this guideline works well from their perspective and certainly down the road. If there are any modifications or refinements to this contingency guideline that would make sense given the breadth of the people in this market, we're very willing to consider them," said Miller.

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