Trade Processing

A solid trade processing system is a must for any risk management system. Rather than forcing users to abide by system imposed restrictions, users should have full function control over entering and tracking all types of trading activity from simple forward sales to buying and selling options and futures. Traders need effective tools for automating pair-offs, dollar rolls and trade allocation for dealer notification.

PRMS has addressed these issues in an easy-to-use interface design. Where applicable, pull-down menus supply users with valid selection options reducing the occurrence of data-entry errors.

The trade module supports the use of the following standard security types:

• Mandatory MBS
• Cash Flex
• MBS Put
• MBS Call
• Treasury Cash
• Treasury Put
• Treasury Call
• Treasury Future

In many systems, the issue of pair-off allocations and dollar rolls becomes a convoluted process that requires some sort of work-around to accommodate the user's needs. PRMS has an intelligent pair-off allocation tool that assists the user in allocating pair-offs to outstanding trades. This feature analyzes the pair-off trade and searches the database for outstanding trades that match the characteristics of the pair-off. By taking into account previous pair-off and delivery allocations, PRMS guides the user through the process of allocating the pair-off trade. This ensures accuracy of pair-off allocations and prevents users from making critical trading mistakes.

Risk Analysis

Effective pipeline risk management is one of the most critical challenges for mortgage bankers. Understanding the risk associated with locked positions and the sensitivity of these positions to movements in interest rates is required for risk managers to make effective trading decisions. The PRMS Mark-to-Market Position Report and Sensitivity Analysis provides the risk manager with the necessary information for pipeline hedging decision-making.

The PRMS system combines powerful analytics with a straight-forward, easy to use UI which enables the user to quickly understand the current position, analyze the position against various interest rate shock scenarios and determine appropriate actions at the click of a button.

System Integration

PRMS offers total flexibility with regards to interfacing with existing front-end systems. Users have the capability of importing the following data:

• Fallout History
• Yield History
• Current Position
• Buy-up/Buy-down Grids
• Current Market Prices

Where applicable, PRMS allows the user to specify whether imports should overwrite existing data or append to the existing data. Additional import features allow the PRMS user to maintain accurate data tables, resulting in higher accuracy during the analysis phase.
Rather than attempt to account for all data fields that various mortgage bankers may wish to include in history, PRMS analyzes the user's import file and builds a custom database based on that import file. This provides exceptional flexibility for the user. Implementation is greatly simplified since there are no hard-coded exports to build within existing systems. Additionally, if the risk manager wants to change the data elements used for modeling, he only needs to change the front-end system's export file. The need for creating identical file definitions on multiple systems is eliminated.

Summary of System Reports

MTM Position Report

One of the fundamental report needs of risk managers is the MTM Position Report. This report combines net position information with current mark-to-market information. The MTM Position Report automatically slots loans into delivery months based on close date or lock expiration date taking into account the users indicated processing time for various delivery types. The risk manager is provided with a breakdown of the current position by hedge group, security instrument, coupon, loan status and trade type. By reporting this information by settlement month, it also assists the risk manager in forecasting future gains/losses. The report also contains a suspect data section that provides loan numbers and/or trade numbers that have suspect data or are missing required pricing information. In addition, the current PRMS Activity Log is included indicating the current status of the data used to produce the report.

PRMS Fallout Matrix

This report provides invaluable information to risk managers. The PRMS Fallout Matrix analyzes each loan source's fallout performance based on a matrix on interest shifts. The information is broken down by loan source and purpose. The report also produces a variance coefficient that indicates the overall variance in a loan source's closing ratio between rising rate environments and falling rate environments. The risk manager can use this information to identify loan sources that have very low closing ratios while rates are falling and very high closing ratios when rates are rising. This enables management to identify those loan sources that are causing increased hedge costs associated with adverse selection.

PRMS Shock Analysis

The Shock Analysis Report is a graphical representation of the current position's sensitivity to interest rate movements. This tool provides a wide range of flexibility allowing the risk manager to drill down into specific areas of the position. To further assist the risk manager, the shock analysis can be re-stated using any security instrument defined in the system. Inclusion of a "what-if" trading module simplifies the process of selecting appropriate hedges for the position.

PRMS Model Overview

The PRMS Model Overview provides a summary of each of the data elements that comprise the user's currently defined prediction model. This information explains the predictive nature of each data element, its statistical significance and relative predictive strength. The risk manager can use this report to identify certain elements that are having exceptional impact on closing probability. For example, if it was determined that a certain loan program had exceptionally poor performance in terms of overall closing percentage or closing volatility, the risk manager could examine the program closely to determine if that program should be discontinued or modified in some fashion.

Trade Log

The Trade Log report allows the risk manager to view current trades. The user has the ability to sort this report by trade type, dealer or trade date. Also, the user can produce the report based on trade dates or settlement dates that fall within a given range.

Open Trades

The Open Trades report provides the risk manager with a summary of all trades for a particular settlement date including the allocated, paired-off and open portions of each trade.  This report ensures successful settlement of all trades.

Best Execution Report

The Best Execution Report presents the results of the PRMS best execution analysis. Execution results are sorted by program group, loan-level note rate and settlement. The risk manager uses this report for pricing as well as delivery and pooling decisions.

Delivery Allocation Report

To gain efficiency and reduce the number of costly errors associated with dealer notification, the Delivery Allocation Report was included. This report is produced for a given settlement date and indicates all outstanding trades. Each trade is listed along with appropriate pair-off information, delivery allocations, principle settlement amounts, interest payable upon settlement and total funds due on settlement. This report is broken down by dealer and security type.

Trend Analysis Reporting Tool

The Trend Analysis Reporting Tool provides an interactive, graphical means of identifying pipeline trends with regard to loan lock volume, closed loan volume and fallout. This data may then be exported an Excel workbook for further analysis.

Best Execution Analysis

In order to maximize profits, mortgage bankers must be able to take advantage of the very best delivery option available. The PRMS Best Execution Engine provides the information needed by risk managers to make important pricing and hedging decisions.
A result table is generated that stores the components of the execution analysis by product group, instrument, buy-up/buy-down method, delivery date and loan-level note rate. These components include a breakdown of agency buy-up, buy-down and excess servicing amounts. This table is available to risk managers to be used as the basis for daily pricing models. This information can also be utilized in the loan delivery and pooling areas to build pools that maximize both agency buy-up and excess servicing within the constraints entered by the user.

Delivery Allocation

Users can take advantage of automatic delivery optimization within PRMS. This optimization routine examines the delivery type and settlement date, selects all appropriate trades and allocates the delivery to the trades in a manner that will maximize profits based on current market prices and trade variances.

This tool is also critical for managing the outstanding trade position and avoiding surprises on settlement day resulting from a trade that was overlooked in the allocation process. The delivery allocation tool presents the user with a table of trades matching the delivery characteristics. This table provides the user with pertinent trade data, partial pair-off amounts, and previous delivery allocations.