Freddie Mac will offer holders of 45-day, TBA-eligible and non-TBA-eligible Gold PCs and Giants the option to exchange their eligible 45-day securities for 55-day Freddie Mac securities and float compensation. For the TBA-eligible security exchanges, the 55-day corresponding security will be a Uniform Mortgage-Backed Security (UMBS™) or Supers, while for non-TBA eligible exchanges, the corresponding security will be a 55-day Freddie Mac MBS or Giant MBS.
Most elements of the new 55-day security received upon exchange will exactly match those of the PC or Giant being exchanged – most fundamentally, the cash flows of the 55-day security will ultimately be backed by the same loans as the original PC or Giant. Each new 55-day security will mostly have the same characteristics as the corresponding PC such as unpaid principal balance, pool factor, and weighted average coupon. The 55-day security will have a new CUSIP, prefix, pool number, and issuance date.
Yes, more details regarding exchange are available on the Gold PC Exchange webpage.
Freddie Mac is offering the exchange to promote liquidity in the 55-day TBA-eligible market. The exchange of non-TBA eligible securities for 55-day Freddie Mac MBS will help provide greater consistency across Freddie Mac’s fixed-rate securities population. After the Single Security Initiative’s implementation, all new issue Freddie Mac Single Family fixed-rate securities will have a 55-day payment delay.
No, investors who exchange portions of a Gold PC will receive portions of the corresponding 55-day security in return. Each investor can decide to exchange his or her portion independently of other holders of the same PC.
No, exchange transactions will be initiated at the option of investors and will not be mandatory.
Currently, Freddie Mac expects to offer holders of exchange-eligible Gold and Giant PCs the ability to choose between two exchange paths:
Yes, investors will receive a one-time payment that will be the approximate fair value compensation for the 10 days’ delay of the bond’s payment, or float compensation. For the Direct-to-Freddie Mac exchange path, this compensation will be paid through a one-time cash payment. For the Dealer-facilitated path, we anticipate the dealer will likely net the float compensation payment from the buy-back price of the 55-day security.
The exchange offer is expected to open in May 2019, the month prior to the Single Security Initiative go-live. The Dealer-facilitated path will stay open for the foreseeable future, while the Direct-to-Freddie Mac exchange path is expected to stay open for 3-5 years.
To facilitate exchanges, Freddie Mac is creating 55-day mirror securities on a one-for-one basis for all exchange-eligible 45-day PCs and Giants. Freddie Mac concluded the first mirror security issuance period on October 26. The list of exchange-eligible 45-day securities can be found on the Cumulative 45-day to 55-day Exchange Activity File. These mirror securities, which are included in Freddie Mac’s Daily New Issue File as they are issued, will not be available for exchange until the official opening of the exchange offer in May 2019.
Issuing a one-for-one mirror security for every exchange-eligible 45-day security may improve the speed and efficiency of exchange transactions, as well as maintain a consistent, one-to-one relationship between the eligible 45-day CUSIPs and their corresponding 55-day CUSIPs. Most security characteristics of the new 55-day securities will mirror their corresponding 45-day securities (e.g., issuance UPB and current factor). However, the mirror securities will have a new CUSIP, prefix, pool number, and issuance date. The 55-day security will ultimately be backed by the same collateral that backs the exchanged 45-day security.
All non-ARM, 45-day PCs and Giants that are not 100% committed to a resecuritization can be exchanged. Freddie Mac will continue to issue 55-day mirror securities for Gold PCs as they are created until go-live, when Freddie Mac will cease issuing new Gold PCs. The list of exchange-eligible 45-day securities can be found on the Cumulative 45-day to 55-day Exchange Activity file.
Freddie Mac will publish several new exchange disclosures to facilitate tracking the outstanding supply across 45- and 55-day cohorts. These new disclosures will be contained in three new reports – a Daily Exchange Activity report, a Cumulative Exchange Activity report and a Daily Level 1 (L1) report. Freddie Mac will also provide tie-out tables so that market participants can verify their supply calculations against Freddie Mac’s disclosures. The disclosure can be found on the Exchange Data Files webpage.
Yes, for the Dealer-facilitated exchange path, Freddie Mac is currently running the Dealer Direct Customer Test Environment. Please contact email@example.com to be included in the exchange dealer certification process.
For the Direct-to-Freddie Mac path, market participants will be able to test the exchange process with Tradeweb in late Q1 2019.
Please direct any questions related to exchange to Freddie Mac via email at firstname.lastname@example.org or via phone over the Freddie Mac Single Security Hotline at (800) 336-3672, option 1 (business partner), then option 2 (Single Security and/or exchange).
The Enterprises have received guidance from the SEC that it does not object to treatment of an exchange as a minor modification of the existing security. By concluding that the exchange is a minor modification, we believe that holders of the security would carry over the basis of their 45-day securities and would recognize the cash compensation received for the 10-day delay in payment cycle as a basis adjustment on the 55-day Freddie Mac security they received. The Enterprises posted the confirmation letter and companion document on their websites.
The IRS published its Revenue Ruling 2018-24 regarding certain tax treatment of the Gold PC exchange. According to the ruling, the exchange of 45-day Gold PC securities for 55-day Freddie Mac mortgage-backed securities will not be taxable. The IRS did not rule on the taxability of the associated float compensation payment, and is not expected to provide additional guidance on this topic.
Investors must rely on their own tax and accounting advisors to determine the best course of action.
Freddie Mac will treat the float compensation payment as a tax-free adjustment to the security basis. As such, for those investors that execute their exchange through the Direct-to-Freddie Mac path, Freddie Mac does not intend to report the payment as taxable income to the investor or to the IRS. However, Freddie Mac is not dictating to investors how they must treat the payment. Some investors may conclude, after consulting with their tax advisors, that the float compensation is taxable income when received.
The tax treatment outlined above does not constitute tax advice. Each Gold PC holder who decides to exchange should make their own decision. Freddie Mac advises each counterparty to consult with their tax advisor as to how they should handle this transaction.
Because Freddie Mac will be treating this payment as a tax-free adjustment to the basis of the security price, we do not intend to report the payment as taxable income to the investor or to the IRS.
Yes, Freddie Mac must have a valid W-8 or W-9 on file for each counterparty with whom we exchange – either a dealer or an investor. For the Direct-to-Freddie Mac path, a completed W-8 or W-9 will be collected by Freddie Mac as part of the setup process. Since dealers performing exchange via the Dealer-facilitated path are in most cases already approved to do business with Freddie Mac, they will not be required to re-submit W-8 and W-9 forms.
It is Freddie Mac’s policy to collect a W-8/W-9 on all counterparties with whom it does business.
For the Direct-to-Freddie Mac path, Tradeweb will collect the appropriate tax documents as part of the Know Your Customer (KYC) and onboarding process.
For the Dealer-facilitated path, a Dealer who is not already a Freddie Mac-authorized Dealer will submit their W-8 or W-9 as part of the approval and setup process.
No, the counterparty cannot enter into an exchange transaction until it has been approved to do business with Freddie Mac.
We anticipate that the approval process utilizing the Direct-to-Freddie Mac path should take approximately two to three weeks. Counterparties should plan accordingly.
At this time, we anticipate the application process will begin in Q1 2019.
45-day, 15-year, TBA-eligible Gold and Giant PCs that are 100% backed by 10-year collateral will be eligible for exchange into a 10-Year TBA Uniform Mortgage-Backed Security (UMBS, CN prefix). Please refer to the Freddie Mac 45-day Exchange-Eligible 10-year Securities listing for the 45-day securities that meet this eligibility criteria.
Mirror securities are distinguished by pool numbers beginning with ’Z’, along with the "SCR" designation in the Seller/Servicer disclosure field. Most characteristics of the new 55-day securities will mirror their corresponding 45-day securities (e.g., issuance UPB and current factor). However, the mirror securities will have a new CUSIP, prefix, pool number, and issuance date.
Previously issued mirror securities and their corresponding Gold PCs can be retrieved through the Cumulative 45-day to 55-day Exchange Activity report on the Freddie Mac website. Enter today’s date to view and download the most recent report.
The initial mirror security issuance period began on August 7, 2018 and will run to the end of October 2018. It covers all existing 45-day exchange-eligible securities currently outstanding. Exchange-eligible 45-day securities issued between the initial mirror security issuance period and the Single Security Initiative go-live will be mirrored prior to go-live. Until the exchange offer commences, all mirror securities will be held in a Freddie Mac account at the New York Federal Reserve bank.
The initial mirror securities issuance period will cease once all outstanding exchange-eligible 45-day securities have a corresponding mirror security issued. This initial mirror securities issuance period is expected to run through October 2018. There will be catch-up mirror securities issuance periods as new exchange-eligible 45-day securities are issued up until go-live.
First, investors should understand the features and benefits of both exchange paths, determine which path(s) they prefer to use, and complete the setup for the selected path(s).
For the Dealer-facilitated path, they need to ensure they have the appropriate agreements in place, with the dealer as the counterparty and all required Know Your Customer information in place. Investors will need to make sure exchanges can be appropriately identified by their systems and their custodian’s systems. Investors are strongly encouraged to use SWIFT tags to flag the transactions as exchanges so that the appropriate accounting and tax processes will run correctly.
For the Direct-to Freddie Mac path, investors are required to establish Freddie Mac as a counterparty, supply appropriate KYC documentation to Tradeweb as needed (Tradeweb will perform KYC on Freddie Mac’s behalf), and provide a settlement contact to Freddie Mac.
Freddie Mac expects the maximum available capacity on a given day will be 50,000 exchanges for the Dealer-facilitated and Direct-to-Freddie Mac exchange paths, combined. Some additional capacity may be made available if necessary. For capacity purposes, an “exchange” is an individual CUSIP or piece of a CUSIP. Par amounts greater than $50 million will take up more than one unit of capacity, per Fedwire limits.
Yes, there will be blackout dates for settlement: the first 5 business days of each month, Reg A Settlement day, Reg B Settlement day, the REMIC collateral delivery day (EOM-2), and standard bank holidays.
Freddie Mac will publish a list of exchange dealers following completion of the certification process.
Complete the certification process. Dealers may begin that process by emailing email@example.com to opt in.
Investors will initiate the exchange transaction in their order management system (OMS) or directly in Tradeweb. Once submitted, Tradeweb will provide exchange data, including the float compensation to be paid, in their "List Trade" format for the investor to review. Once the investor agrees to the exchange transaction details, Tradeweb will confirm the exchange transaction, which will be free delivery, with Freddie Mac, and send a confirmation back to the investor in a standard FIX message format. Freddie Mac will perform the settlement and wire the float compensation payment to the investor. Additional details regarding the exchange path can be found in the Market Adoption Playbook. Stakeholders may also contact Tradeweb directly with questions at firstname.lastname@example.org.
Yes, both exchange paths will be open for all exchange-eligible securities.
Yes, all Freddie Mac fixed-rate 45-day PCs and Giants not 100% committed to a resecuritization may be exchanged. Holders of TBA-eligible securities will receive 55-day UMBS or Supers in the exchange, while holders of non-TBA-eligible securities will receive a Freddie Mac 55-day non-TBA-eligible MBS or Giant MBS.
Yes, please refer to the Cumulative 45-day to 55-day Exchange Activity File to determine if the security is eligible to be exchanged.
No, these securities are not exchange eligible.
No, Fannie Mae TBA-eligible-securities will not need to be exchanged. The Fannie Mae TBA-eligible MBS will be fungible with UMBS.
No, Freddie Mac will not charge a fee for exchanges.
Freddie Mac does not expect dealers to charge a fee to execute an exchange; however, investors should consult their dealer(s) to understand any costs or fees associated with exchanging through them.
They can be found on the Exchange Data Files webpage. Currently, only the Cumulative 45-day to 55-day Exchange Activity file is posted. The Daily 45-day to 55-day Exchange Activity files and the Aggregate Level 1 Collateral Exchange Activity File will be available once exchange transactions begin in May 2019.
Freddie Mac will provide fair compensation through a one-time cash payment for the 10 days in payment delay when an investor exchanges 45-day PCs for 55-day. Freddie Mac expects to offer a schedule of payment rates that will be informed by fair value, with at least one payment rate for every term and coupon combination. Fair value estimates will be determined using a combination of internal and third-party OAS models. Payment rates will be expressed in ticks, with the cash payment calculated as the payment rate multiplied by the UPB of the exchanged securities. Payments offered to market participants could differ from model values and Freddie Mac reserves the right to change values over time.
Freddie Mac also expects to offer payment adjustments (pay-ups) to the compensation rate for pools that have certain characteristics that may have a material impact on the value of the exchange float compensation payment. We expect these pay-ups will be added to the base compensation rate based on the term and coupon of the security to determine the final payment rate for the security.
The exchange float compensation payment will be provided through a one-time cash payment on the exchange settlement day. For the Dealer-facilitated path, because it is a DVP transaction between the dealer and the investor, Freddie Mac believes most dealers will net the float compensation payment from the buy-back price of the 55-day security. For the direct-to-Freddie Mac path, Freddie Mac will make the float compensation payment to the investors.
During the fourth quarter of 2018, Freddie Mac expects to post an indicative float compensation payment tool. Using the tool, investors can enter their CUSIPs to see an indication of the exchange float compensation they would receive. Prior to go-live, the tool will just include indicative prices based on certain interest rate assumptions. Investors will be able to use the tool once the exchange offer commences to get a more accurate float compensation schedule.
Freddie Mac has built the exchange process to support T+1 settlements, and that will be the standard timing. However, when the exchange window opens in May 2019 and for a period of perhaps 3-6 months following, exchanges will settle T+2. Freddie Mac’s goal is to ensure a smooth transition for all exchange stakeholders, so we will moderate the timing and volume of exchange transactions for several months. This will allow the market and Freddie Mac to prepare and become accustomed to the exchange process.
Through the Dealer-facilitated path, Freddie Mac expects exchange settlements to be booked up to one month ahead of the current month. Freddie Mac expects that investors using the Direct-to-Freddie Mac path will be able to book for the current month only.
For both exchange paths, exchanges can be cancelled if needed until noon on the business day prior to settlement date. There will be no charge or penalty for cancelled exchanges.
For the Dealer-facilitated path, dealers will be allowed to make any of the following modifications after an exchange transaction has been agreed to (and before noon on the business day prior to settlement date):
For the Direct-to-Freddie Mac path, investors will only be able to cancel exchange transactions after they have been agreed to (and before noon on the business day prior to settlement date). If investors wish to change the settlement date or remove collateral from a booked exchange transaction, they will need to cancel the entire list trade and rebook.
All eligible PCs and Giant PCs to be exchanged must be delivered to Freddie Mac by noon. Freddie Mac will process all eligible exchanges, up to the pre-confirmed daily capacity, as they come in, and return the corresponding 55-day securities promptly. Freddie Mac expects that cash wires for float compensation will be sent to the dealer or investor, depending on the path selected, between 4-6 PM on settlement day.
For the Dealer-facilitated path, if any portion of the exchange transaction fails on the settlement date, only the part of the transaction that corresponds with that line item will fail. The failed line item will automatically be rebooked by Dealer Direct to the next business day with available capacity, no less than two days out.
For the Direct-to-Freddie Mac path, each exchange/transaction will succeed or fail on an individual basis. There is no auto-rebooking of failed exchanged transactions on settlement day. If the exchange transaction fails, the investor should re-book a new exchange transaction if they still wish to exchange that particular CUSIP.
No, exchanges are not reversible.
Holders of Freddie Mac Gold PCs that wish to trade in a Freddie Mac 55-day UMBS will need to close the position, by either pairing off the position, or taking delivery of the 45-day Freddie Mac PCs, or roll the position by selling Freddie TBA and buying UMBS TBA. Note that the decision to roll from 45-day into 55-day UMBS must be worked out with the trade counterparty. If they wish to continue rolling their Gold PCs, they may do so as long as there is a market for them.
Based on conversations with market participants, Freddie Mac does not expect there to be different haircuts for the 45-day security and the 55-day security. Investors that need to roll Fannie Mae MBS from May to June should have no problems doing so; Fannie Mae MBS will be fungible with UMBS at go-live.
See the following chart for more details.
|Trade Type||Transaction Date||To Close Position||To Roll Position|
|FNCL Sale - Fannie Mae MBS||Before Implementation (March 2019 trade, April 2019 settle)||Pair off position or deliver Fannie Mae MBS||May 2019 TBA 01F|
|Before Implementation (April 2019 trade, May 2019 settle)||Pair off position or deliver Fannie Mae MBS||Roll position by selling May 2019 Fannie Mae 01F TBA and buying June 2019 01F TBA*|
|FNCL Sale - UMBS*||During Implementation (May 2019 trade, June 2019 settle)||Pair off position or deliver UMBS||Roll position with UMBS TBA* (Sell June 2019 UMBS TBA - buy July 2019 UMBS TBA)|
|After Implementation (June 2019 trade, July 2019 settle)||Pair off position or deliver UMBS*||Roll position with UMBS TBA* (Sell July 2019 TBA - buy Aug 2019 TBA)|
|FGLMC Sale - Freddie Mac PCs||Before Implementation (March 2019 Trade, April 2019 settle)||Pair off Position or deliver 45-day Freddie Mac PCs||Roll short position with Freddie Mac TBA 02R|
|Before Implementation(April 2019 Trade, May 2019 settle)||Pair off position or deliver 45-day Freddie Mac PCs||Roll position by selling May 2019 02R Freddie Mac TBA and buying June 2019 UMBS TBA 01F*|
|During Implementation (May 02R 2019 trade, June 2019 01F settle) *||Pair off position or deliver 45-day Freddie Mac PCs||Roll position by selling June 2019 01F TBA - buy July 01F 2019 TBA|
|After Implementation (June 2019 01F trade, Jully 2019 01F settle)||Pair off position or deliver 45-day Freddie Mac PCs||Roll position by selling July 2019 01F TBA - buy August 01F 2019 TBA|
* UMBS TBA contracts may be satisfied by delivery of existing Fannie Mae MBS or new Fannie Mae-issued UMBS, legacy Freddie Mac PCs that have been exchanged for their 55-day mirror securities, new issue 55-day Freddie Mac-issued UMBS, and single-issuer or commingled Supers issued by either Enterprise. These securities trading groupings may be impacted by SIFMA decisions regarding TBA fungibility.
You must have the securities in your possession to exchange them. For securities on repo, you may need to substitute the pledged collateral to retrieve the securities/CUSIPs to exchange.
No, an investor cannot perform an exchange with multiple PCs and create a Supers in one transaction. The investor could exchange their Gold PCs for corresponding UMBS; this would occur over multiple transactions based on the number of PCs to be exchanged. Then the investor could resecuritize these UMBS into a Supers in a separate transaction.
FINRA has stated that a members facilitation of an exchange of a 45-day Freddie Mac PC or Giant PC for a 55-day security is not reportable under Rule 6730 as long as the prices of the PC and UMBS utilized to effect the exchange only reflect and pass through the float compensation provided by Freddie Mac. For more information, reference the FINRA TRADE FAQ page, specifically question 3.112.
Freddie Mac expects its mirror securities, received upon an exchange, to trade at similar prices to comparable Fannie Mae-issued UMBS.
For the first 3 to 6 months of the exchange offering, Freddie Mac will only allow T+2 settlements for exchange. Also, Freddie Mac will limit the daily exchange volume to make sure all transactions can be executed in the allotted time. Freddie Mac plans to ramp up the daily volume gradually as the market gains experience with the process. We want to ensure that both operational paths are working as expected, and that all parties – investors, dealers, custodians, and Freddie Mac – are able to effectively manage exchanges.
This is not an offer to buy or sell any Freddie Mac securities. Offers for any given security are made only through applicable offering circulars and related supplements, which incorporate Freddie Mac’s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC); all other reports Freddie Mac files with the SEC pursuant to Section 13(a) of the Securities Exchange Act of 1934 (Exchange Act), excluding any information "furnished" to the SEC on Form 8-K; and all documents that Freddie Mac files with the SEC pursuant to Sections 13(a), 13(c) or 14 of the Exchange Act, excluding any information “furnished” to the SEC on Form 8-K.
The financial and other information contained in this FAQ document and in the documents that may be accessed through this FAQ document speaks only as of the date of those documents. The information could be out of date and no longer accurate. Freddie Mac undertakes no obligation, and disclaims any duty, to update any of the information in those documents.
These materials may contain forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond the company’s control. Management’s expectations for the company’s future necessarily involve a number of assumptions, judgments and estimates, and various factors could cause actual results to differ materially from the expectations expressed in these and other forward-looking statements. These assumptions, judgments, estimates and factors are discussed in the company’s Annual Report on Form 10-K for the year ended December 31, 2017, and its reports on Form 10-Q and Form 8-K, which are available on the Investor Relations page of the company’s Web site at www.FreddieMac.com/investors and the SEC’s website at www.sec.gov. The company undertakes no obligation to update forward-looking statements it makes to reflect events or circumstances occurring after the date of this FAQ document.