What Is the 48-Hour Rule?
The 48-hour rule is a critical requirement in the mortgage-backed securities (MBS) market. This regulation mandates that sellers of to-be-announced (TBA) mortgage-backed securities (MBS) must communicate all relevant pool information to buyers by 3 p.m. Eastern Time, 48 hours before the trade settlement date. The Securities Industry and Financial Markets Association (SIFMA) enforces this rule to ensure market transparency and efficiency.
Key Takeaways
- The 48-hour rule is fundamental to the mortgage allocation process for TBA mortgage-backed securities (MBS).
- Sellers are required to inform buyers of the underlying mortgage details by 3 p.m. ET, 48 hours before settlement.
- This rule is enforced by the Securities Industry and Financial Markets Association (SIFMA).
- The TBA market helps facilitate trading by assuming mortgage pools are more or less interchangeable, thus enhancing liquidity.
- Essential trade details such as price, par, and coupon are agreed upon, but not the specific underlying mortgages until 48 hours before settlement.
- The TBA market is the second most frequently traded secondary market, following the U.S. Treasury market.
The Importance of the 48-Hour Rule
A mortgage-backed security (MBS) is a bond backed by mortgage loans. Similar loans are grouped together to form a pool, which is then sold as a security to investors. Interest and principal payments to investors are disbursed based on payments received from borrowers of the underlying mortgages. Importantly, investors receive these interest payments monthly.
Function and Rationalization of TBAs
In a to-be-announced (TBA) trade, parties agree to buy or sell MBS on a specified future date without knowing certain specifics, such as pool number or the exact transaction amount. This standardization assumes MBS pools are interchangeable, thereby facilitating trading and enhancing liquidity in the market.
The 48-hour rule is an integral aspect of this system, bringing transparency to MBS trades by ensuring all involved parties are fully informed about the mortgage components before settlement. Given the standard T+3 settlement schedule, these notifications typically occur the day after the trade execution.
Execution of the 48-Hour Rule in TBA Trades
The TBA trading process simplifies transactions by using a small number of standardized contracts to trade MBS with various characteristics. Buyers and sellers agree on basic parameters like issuer, maturity, coupon rate, price, par amount, and settlement date, with specific securities disclosed 48 hours before settlement.
Historical Perspective
Initiated in the 1970s, the TBA market aimed to streamline the trading of MBS from issuers like Fannie Mae, Freddie Mac, and Ginnie Mae, allowing mortgage lenders to hedge their origination pipelines. Today, it remains the most active and liquid secondary market for mortgage loans, surpassed only by the U.S. Treasury market in terms of trade volume.
Example of the 48-Hour Rule
Consider the following scenario:
- Sell Arrangement: Company ABC decides to sell a mortgage-backed security (MBS) to Company XYZ, and the transaction is agreed upon on a Tuesday.
- Unknown Mortgages: At the point of agreement on Tuesday, neither party knows the specific underlying mortgages.
- Settlement and Notification: Given the T+3 settlement, the trade will finalize on Friday. According to the 48-hour rule, by 3 p.m. ET on Wednesday, Company ABC must notify Company XYZ about the exact mortgage allocations involved.
Related Terms: Mortgage-backed securities, Trade settlement, Liquidity, Mortgage allocation, SIFMA.
