To be announced (TBA) is a term predominantly used in the world of mortgage-backed securities (MBS) trading. It represents forward-settling MBS trades, particularly involving pass-through securities issued by Freddie Mac, Fannie Mae, and Ginnie Mae. The term “TBA” emerges from the intricacy that the actual MBS to be delivered is not designated at the time of trade execution but is revealed 48 hours prior to the settlement date.
TBA also occasionally denotes pending corporate announcements or information yet to be determined (TBD).
Key Takeaways
- TBA refers to selling mortgage-backed securities whose specifics are undisclosed until closer to the settlement date.
- It facilitates efficient trading in the MBS market by providing liquidity, aiding mortgage lenders in hedging their origination pipelines.
- TBA trading involves intricate details best navigated by experienced professionals.
- Due to inherent uncertainties, TBA trades come with considerable risk.
- TBA is often used interchangeably with TBD in broader contexts.
Breaking Down TBA
A TBA stands as a contract to buy or sell MBS on a specified date, without including details like pool numbers, the count of pools, or the precise amounts transacted. An MBS is fundamentally a bond secured by a pool of mortgage loans featuring similar characteristics.
Interest and principal payments are directed to investors based on the corresponding payments from the mortgage borrowers. Unlike certain bonds, these payments are disbursed monthly.
The TBA market presumes the MBS pools to be adequately interchangeable. This assumption boosts liquidity by allowing diversified MBSs to be traded through standardized contracts. The pivotal parameters agreed upon in TBA trades include issuer, maturity, coupon, price, par amount, and settlement date.
Each type of agency pass-through security possesses a monthly trade settlement date, with pool information exchanged 48 hours prior to this deadline. Trades are executed in $1 million lots, making the TBA market second only to the U.S. Treasury market in terms of trading volume.
Special Considerations: TBA Trade Risks
Given the forward-settling nature, TBA trades face a risk of counterparty default between trade execution and settlement. This risk escalates in volatile markets where re-securing similar deal terms post-default can be daunting. Mitigating this risk often involves collateral assignments, although not all firms can access collateral management services readily.
The Financial Industry Regulatory Authority (FINRA) stepped in January 2014, instituting margin requirements intended to curtail risks for longer-settlement TBA trades, impacting specific entities rather than short-term transactions.
Other Uses of TBA
Beyond bond markets, “to be announced” often means the same as “to be determined” (TBD), indicating pending decisions on events or information such as annual meetings, shipping schedules, or staffing updates.
For example, a company’s official meeting date may be set as TBA until finalized, or a new manager’s appointment might be listed as TBA pending concluded negotiations.
Frequently Asked Questions
Does TBA have a distinct meaning in finance?
In finance, TBA specifically refers to particular mortgage-backed securities trades where the actual details of the securities remain undisclosed until later. Buyers and sellers agree on broad parameters first, with the specific securities revealed 48 hours before the settlement date.
What differentiates TBA from TBD?
Outside the MBS market, TBA and TBD are often used synonymously. However, TBA technically follows something predetermined (TBD), announcing forthcoming specifics post deciding on an event or piece of information.
When are MBS trades described as TBA?
A TBA trade essentially is a contract for buying or selling mortgage-backed securities on a specific date, lacking pool-specific details. This setup leverages the interchangeability of MBS pools to facilitate trading and maintain market liquidity.
Related Terms: liquidity, pass-through securities, mortgage-backed securities.
References
- U.S. Securities and Exchange Commission. “Mortgage-Backed Securities and Collateralized Mortgage Obligations”.
- CME Group. “Understanding 30-Year UMBS TBA Futures and its Delivery Process”.
- FINRA. “FINRA Requests Comment on Proposed Amendments to FINRA Rule 4210 for Transactions in the TBA Market”.
