What Is the 48-Hour Rule?
The 48-hour rule is a requirement that sellers of to-be-announced (TBA) mortgage-backed securities (MBS) communicate all pool information with respect to the MBS to buyers before 3 p.m. Eastern Time, 48 hours before the settlement date of the trade. The Securities Industry and Financial Markets Association (SIFMA) authorizes this rule. SIFMA was formerly known as the Public Securities Association or Bond Market Association.
Understanding the 48-Hour Rule
A MBS is a bond that is secured, or backed, by mortgage loans. Loans with comparative traits are gathered to form a pool. The pool is then sold as a security to investors. The issuance of interest and principal payments to investors is at a rate in view of the principal and interest payments made by the borrowers of the underlying mortgages. Investors receive interest payments monthly rather than semiannually.
A to-be-announced (TBA) trade is effectively a contract to buy or sell mortgage-backed securities (MBS) on a specific date. It does exclude information with respect to the pool number, the number of pools, or the exact amount engaged with the transaction, and that means the underlying mortgages are not known to the parties. This exclusion of data is due to the TBA market expecting that MBS pools are pretty much interchangeable. This interchangeability works with trading and liquidity.
The 48-hour rule is part of the mortgage allocation process, the period when the underlying mortgages will be assigned and made accessible to a specific MBS, which was created to carry transparency to TBA trade settlements.
The 48-hour rule states that the seller of a specific MBS must make the buyer of that MBS aware of the mortgages that make up the MBS 48 hours prior to the trade settling. As a result of the standard T+3 settlement date, this generally happens on the day after the trade is executed.
The 48-Hour Rule as Part of the TBA Process
The TBA interaction benefits buyers and sellers since it expands the liquidity of the MBS market by taking thousands of different mortgage-backed securities with different characteristics and trading them through a modest bunch of contracts.
Buyers and sellers of TBA trades settle on a couple of fundamental parameters, for example, issuer maturity, coupon, price, par amount, and settlement date. The specific securities associated with the trade are announced 48 hours before the settlement.
The TBA market was established during the 1970s to facilitate the trading of MBS issued by Fannie Mae, Freddie Mac, and Ginnie Mae. It permits mortgage lenders to hedge their origination pipelines.
The TBA market is the most liquid secondary market for mortgage loans, resulting in high levels of market activity. In fact, the amount of money traded on the TBA market is second just to the U.S. Treasury market.
Illustration of the 48-Hour Rule
Company ABC chooses to sell a mortgage-backed security (MBS) to Company XYZ and Company XYZ accepts. The sale will take place on Tuesday. On Tuesday, when the sale is made, neither Company ABC nor Company XYZ knows the underlying mortgages that make up the mortgage-backed security (MBS).
The standard industry settlement is T+3 days, meaning this trade will settle on Friday. As per the 48-hour rule, on Wednesday before 3 p.m. Eastern Time, Company ABC should notify Company XYZ of the mortgage allocations it will receive when the trade settles.
- Certain information is agreed upon when a MBS trade is made, like the price, par, and coupon, but not the underlying mortgages.
- The 48-hour rule alludes to a part of the mortgage allocation process related to the buying and selling of to-be-announced (TBA) mortgage-backed securities (MBS).
- At the point when a MBS is traded in the secondary market, the underlying mortgages are not known, which works with trading and liquidity.
- The Securities Industry and Financial Markets Association (SIFMA) authorizes the 48-hour rule.
- The 48-hour rule stipulates that the seller of a MBS notifies the buyer with the details of the underlying mortgages that make up the MBS by 3 p.m. Eastern Time, 48 hours before the settlement date.
- The TBA market is the second most traded secondary market after the U.S. Treasury market.