What is a 48 hour rule
The 48-hour rule is an obligation for sellers of mortgage-backed securities (MBS) to be notified to communicate all transaction information to buyers before 3 p.m. IS 48 hours before the settlement date of the transaction. The Securities Industry And Financial Markets Association (SIFMA) applies this rule. SIFMA was previously known as the Public Securities Association or Bond Market Association.
BREAKING THE 48-HOUR RULE
The 48-hour rule was created to bring transparency to future trade agreements (to be determined). The TBA market deals with mortgage-backed securities (MBS). At the time a TBA transaction is made, the specific MBS that the seller will deliver to the buyer is not designated.
A TBA transaction is in fact a contract to buy or sell mortgage-backed securities (MBS) on a specific date. It does not include information regarding the pool number, the number of pools or the exact amount involved in the transaction. This exclusion of data is due to the TBA market assuming that the MBS pools are more or less interchangeable.
The TBA process benefits buyers and sellers as it increases the liquidity of the MBS market by taking thousands of different MBSs with different characteristics and trading them through a handful of contracts. The buyers and sellers of operations to be confirmed agree on a few necessary parameters such as the issuer’s maturity, the coupon, the price, the par amount and the settlement date. The specific securities involved in the transaction are announced 48 hours before payment.
Suppose that the settlement date agreed between the buyer and the seller is July 14. The 48-hour rule requires that July 12 at 3 p.m. EST, the seller will have informed the buyer of the exact details of the MBS that will be delivered on July 14. This two-day period is also called a 48-hour day.
Securities backed by mortgages
An MBS is a bond guaranteed or guaranteed by mortgages. Loans with similar characteristics are grouped together to form a pool. The pool is then sold to serve as collateral for the associated MBS. Interest and principal are issued to investors at a rate based on the principal and interest paid by the borrowers of the underlying mortgages. Investors receive interest payments on a monthly rather than semi-annual basis.
The TBA market was created in the 1970s to facilitate the trading of MBSs issued by Fannie Mae, Freddie Mac and Ginnie Mae. It allows mortgage lenders to cover their original pipelines. The TBA market is the most liquid secondary market for mortgages, which translates into high levels of market activity. In fact, the amount of money traded in the TBA market comes just behind the US Treasury market.