The total amount and pace at which the Desk could purchase in these TBA contracts would likely depend on the supply of securities that could be readily delivered and the willingness of investors to sell these securities from their portfolios.15 For these reasons, it can be useful to gauge our purchases both relative to gross issuance as well as the amount of outstanding stock that can likely be delivered into the Desk’s TBA purchases. Since the current purchase program began, the Desk’s purchases have accounted for about 50 percent of gross issuance on average, below the average monthly purchase rate of roughly two-thirds during the first round of large-scale MBS purchases in 2009. If refinancing activity declines, leading to a decrease in gross issuance, our purchases could exceed these levels. Such higher levels still seem unlikely to cause significant market functioning issues, given the considerable supply of existing stock that we believe could be delivered into the Desk’s TBA purchases over time. Nevertheless, not all new securities are issued in the TBA market, and it is difficult to estimate future gross issuance, so the Desk monitors the purchasable supply of MBS closely.16 Purchases of Treasury securities are more straightforward, reflecting the relative simplicity of the market and our long history of operating in it. Treasury purchases are distributed across securities with different maturities, with the intent of removing a specified amount of duration risk from the market without causing significant market disruption.
Despite all that, foreign exchange market participants and central banks in 1974 found Herstatt risk to be an intractable problem. All that was left to banks was to manage it. And so it went for 20 years. Then, in the mid-1990s, Bill McDonough, president of the New York Fed, identified the continued existence of Herstatt risk as a challenge to be met. As chairman of the Committee on Payments and Settlement Systems of the G-10 Central Bank Governors, he spurred the central bank community to take a fresh look. This time, the combination of new financial analysis and the rapidly expanding availability of raw computing power made the difference. •  In what today still stands as a landmark in analysis of the connection between operational and financial risk, the 1996 Allsopp report demonstrated in a straightforward manner just how much financial risk existed in the bilateral settlement of gross principal amounts of foreign exchange – an analysis that provided the insight into how a settlement facility could reduce that risk, and into understanding how settlement management could improve in the interim. •  Raw computing power was essential for the design and risk management of any proposed new settlement facility. Through scenario analysis and stress testing, CLS’s founders could determine the necessary capital and liquidity needs, default handling procedures, and the general benefits of multilateral vs. bilateral netting. The inherently multicurrency nature of foreign exchange settlement of course enhanced the challenge.