Assignment of Trade (AOT)
What Is Assignment of Trade (AOT)?
Assignment of trade (AOT) is a transaction utilized fundamentally in the mortgage-backed securities (MBSs) to be announced (TBA) market, where the obligation to satisfy an existing forward trade is assigned by one of the counterparties to a third party.
AOTs are habitually used to try not to need to make delivery of securities into, or receive delivery of securities from, a TBA trade — a contract to purchase or sell a MBS, a bond that is secured by mortgage loans, on a specific date.
How Assignment of Trade (AOT) Works
AOT is essentially a three-party agreement between a assignor (typically the originator of the underlying mortgages), a assignee (the investor), and a dealer or broker. The assignor is anxious to get the mortgages under the table to eliminate the threat of factors, for example, interest rate risk, prepayment risk, and default risk.
The assignor needs this risk gone as soon as possible, so a hedge is sold as a MBS on the TBA market. Notwithstanding, the MBS actually must be delivered and the AOT can be the most savvy approach to getting that going.
Mortgage originators use AOT to work with the pricing and purchase of whole loans by the third party to which the TBA trade is assigned, with the agreement that the third party will then make delivery of a MBS into the original TBA trade, which was taken out by the mortgage originator as a hedge.
All in all, an AOT permits a mortgage originator to unwind its hedge position by relegating it to the third party and at the same time consenting to sell an equivalent amount of loans to that third party. The price at which the whole loans are sold to the third party is laid out by the price of the trade being assigned.
Illustration of Assignment of Trade (AOT)
The assignor sells a MBS to the dealer for future delivery, making a hedge against a portion of the risks that accompany the loans it has issued. As of now, the dealer is waiting for the pooled security, and the assignor is committed to deliver it.
Enter the third-party assignee who will assume the loans right away, gathering the income streams from them, and afterward delivering the MBS to the dealer and satisfying the obligations of the assignor. The assignee currently holds the loans, and the dealer has the MBS that the underlying loans feed into.
The assignee faces default risks yet can in any case benefit from interest rate shifts that increase the profits from variable loans. The dealer holds the MBS and the prepayment risks that accompany them as well as the settled upon floods of interest and principal. In the mean time, the assignor, as the loan originator, has new space on the books to issue new loans.
This approach can reduce a portion of the expenses that could somehow come as fees, buybacks, and transfers.
Analysis of Assignment of Trade (AOT)
However assignment of trade (AOT) accompanies many benefits, it isn't generally straightforward to appropriately execute. Pundits point out that transactions normally comprise of contributing heaps of significant information from various sources into stacks of desk work, a work serious interaction at times inclined to mistake, and sending messages that are not generally guaranteed to arrive at all participants.
Some industry figures have been calling for a more normalized cycle to be presented, for example, a single electronic platform for trade assignments, to make it simpler for information to be followed, logged, and documented.
Features
- Assignment of trade (AOT) is a three-party agreement that works with the sale of a mortgage-backed security (MBS) pool of loans.
- The mortgage originator sells a MBS to a dealer for future delivery, making a hedge against a portion of the risks that accompany the loans it has issued.
- The third-party assignee will assume the loans right away, gathering the income streams from them, and afterward delivering the MBS to the dealer and satisfying the obligations of the assignor.
