The 48-hour rule is a requirement that sellers of to-be-announced (TBA) mortgage-backed securities (MBS) communicate all pool information in regard 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) authorize this rule. SIFMA was previously known as the Public Securities Association or Bond Market Association.
look at a glance
—The 48-hour rule refers to a part of the mortgage allocation process related to the buying and selling of to-be-announced (TBA) mortgage-backed securities (MBS).
—The 48-hour rule stipulates that the seller of an 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 Securities Industry and Financial Markets Association (SIFMA) authorize the 48-hour rule.
—At the point when an MBS is traded in the secondary market, the underlying mortgages are not known, which helps facilitate trading and liquidity.
—Certain information is settled upon when an MBS trade is made, such as the value, standard, and coupon, but not the underlying mortgages.
—The TBA market is the second most traded secondary market after the U.S. Treasury market.
Understanding the 48-Hour Rule
An MBS is a bond that is secured, or backed, by mortgage loans. Loans with similar traits are grouped to shape a pool. The pool is then sold as a security to investors. The issuance of interest and head payments to investors is at a rate based on the head and interest payments made by the borrowers of the underlying mortgages. Investors get 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 not include information in regard to the pool number, the number of pools, or the exact amount associated 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 assuming that MBS pools are pretty much interchangeable. This interchangeability helps facilitate 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 mindful of the mortgages that make up the MBS 48 hours preceding the trade settling. Because of the standard T+3 settlement date, this usually occurs on the day after the trade is executed.
The 48-Hour Rule as Part of the TBA Process
The TBA process benefits buyers and sellers because it increases the liquidity of the MBS market by taking thousands of different mortgage-backed securities with different characteristics and trading them through a handful of contracts.
Buyers and sellers of TBA trades settle on a couple of necessary parameters such as issuer maturity, coupon, cost standard amount, and settlement date. The specific securities engaged in 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 allows mortgage lenders to support their origination pipelines.
The TBA market is the most liquid secondary market for mortgage loans, resulting in elevated degrees of market activity. The amount of cash traded on the TBA market is second just to the U.S. Treasury market.
Example of the 48-Hour Rule
Organization ABC decides to sell mortgage-backed security (MBS) to Company XYZ and Company XYZ accepts. The sale will take put 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 get when the trade settles.