Key Takeaways
- Forward contracts for agency mortgage-backed securities.
- Specific pools announced 48 hours before settlement.
- Enables high liquidity and standardized MBS trading.
- Sellers choose cheapest-to-deliver pools at settlement.
What is To Be Announced (TBA)?
To Be Announced (TBA) refers to a forward trading mechanism primarily used in the U.S. agency mortgage-backed securities (MBS) market where buyers and sellers agree on key parameters like issuer, coupon, and maturity without specifying the exact mortgage pools until shortly before settlement. This method enables a highly liquid and standardized market for trading agency MBS issued by government-sponsored enterprises.
The TBA market facilitates trading based on agreed face value and coupon rates, allowing participants to hedge or invest without needing full pool details upfront.
Key Characteristics
TBA trading has distinct features that support liquidity and efficiency in the mortgage securities market:
- Forward contract: Trades settle typically 1-2 months after agreement, with price fixed at trade date.
- Pool parameters: Includes issuer, coupon rate, maturity, and AAA-rated credit quality, but pools are unnamed until about 48 hours before settlement.
- Seller flexibility: Sellers deliver conforming pools and often use a "cheapest-to-deliver" option to select from eligible pools.
- Market size: Represents a large portion of daily agency MBS volume, contributing to one of the most liquid fixed income sectors.
- Standardization: Governed by standardized contracts and industry practices to ensure uniform clearance and settlement.
How It Works
TBA trades operate as forward contracts where the buyer commits to purchase MBS with specified characteristics at a future settlement date. The seller commits to deliver pools that meet the agreed criteria but announces the exact pools approximately 48 hours prior to settlement.
The price includes accrued interest and is locked at the time of the trade, with no immediate cash exchange. Sellers choose which specific pools to deliver under rules designed to maintain market integrity and liquidity, such as the "cheapest-to-deliver" provision. This process is tightly regulated by agreements like the Master Securities Forward Transaction Agreement (MSFTA) and industry standards.
Examples and Use Cases
TBA trading is widely used by institutional investors and mortgage originators to manage exposure and hedge pipeline risk:
- Mortgage originators: Use TBA contracts to lock in sale prices for loans in process before pooling.
- Institutional investors: Hedge interest rate risk or gain broad exposure to agency MBS without specifying pools.
- Airlines: Companies like Delta may indirectly benefit from stable financing markets supported by liquid fixed income sectors.
- Bond funds: Fixed income ETFs such as BND often hold agency MBS, including TBA-based securities, to enhance yield and diversification.
Important Considerations
While TBA trading enhances liquidity and standardization, you should be aware of delivery and prepayment risks inherent in agency MBS. Sellers face delivery risk if no pools meet criteria, though this is rare due to government guarantees.
Buyers must consider extension risk from prepayments altering expected cash flows. Access to TBA trades is generally institutional, but futures contracts are expanding participation. Understanding terms like the par yield curve can help in pricing and hedging decisions within this market.
Final Words
TBA trading offers a streamlined way to buy and sell agency MBS with standardized terms, enhancing market liquidity and pricing efficiency. To leverage this, consider analyzing current TBA prices and settlement dates to optimize your mortgage-backed securities strategy.
Frequently Asked Questions
To Be Announced (TBA) is a forward trading mechanism in the U.S. agency mortgage-backed securities market where buyers and sellers agree on key details like issuer, coupon rate, and maturity, but the specific mortgage pools to be delivered are identified about 48 hours before settlement.
In TBA trading, parties agree on parameters such as issuer, coupon, and settlement date, but the seller selects the specific pools shortly before settlement. The price is fixed at trade time, and actual pool delivery happens near the settlement date.
TBA trading standardizes transactions and reduces information asymmetry, which lowers transaction costs and allows for high-volume trading without needing upfront pool details. This creates a highly liquid and efficient forward market for agency mortgage-backed securities.
Mortgage originators use TBA trading to hedge pipeline risk by locking in mortgage rates early, even before loans are pooled. This helps manage interest rate risk during the loan origination process.
'Cheapest-to-deliver' refers to the seller’s option to choose the least valuable conforming mortgage pools that meet the agreed parameters for delivery, providing flexibility and cost efficiency in fulfilling the TBA contract.
TBA trading involves pools that are announced about 48 hours before settlement and are interchangeable if they meet the agreed parameters, while specified pool trading involves exact, identified pools traded upfront, often with premiums for special features.
TBA trading is governed by standards like SIFMA’s Uniform Practices and agreements such as the Master Securities Forward Transaction Agreement (MSFTA), which ensure consistent clearance, settlement, margining, and counterparty onboarding to maintain market integrity.
The TBA market is extremely large, accounting for about $261 billion of the $288 billion in daily agency MBS trading volume, making it the dominant mechanism in this segment and a key component of the U.S. bond market.
