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What must be announced (TBA)?

To-be-announced, or TBA in bond trading, is a term that describes the forward settlement of mortgage-backed securities (MBS) trades. Passes issued by Freddie Mac, Fannie Mae and Ginnie Mae trade on the TBA market, and the term TBA is derived from the fact that the actual mortgage-backed security that will be delivered to execute a TBA transaction is not designated at the time of the transaction . is made. These securities are announced 48 hours before the established settlement date.

TBA can also be used to refer to a pending company announcement or other pieces of information that are yet “to be determined” (TBD).

Key points to remember

  • TBA is a term taken from the sale of mortgage-backed securities, the details of which were not known until later.
  • TBA is used to better facilitate transactions in the MBS market and provide liquidity, allowing mortgage lenders to cover their origination pipelines.
  • A TBA trade does not include all of its details, so it is best left to professionals who understand the nuances of TBA trades.
  • Due to their nature, ATs can sometimes carry considerable risks.
  • TBA is sometimes used interchangeably with TBD (“to be determined”)

Understanding TBA

A TBA serves as a contract to buy or sell an MBS on a specific date, but it does not include information regarding the pool number, the number of pools, or the exact amount that will be included in the transaction. An MBS is a bond secured or backed by mortgages. Loans with similar characteristics are grouped together to form a pool, and this pool is then sold to serve as collateral for the associated MBS.

Interest and principal payments are made to investors at a rate based on the principal and interest payments made by the borrowers of the associated mortgages. Investors receive interest payments on a monthly basis instead of semi-annually.

The settlement procedures for MBS-TBA transactions are established by the Bond Market Association.

This is because the TBA market assumes that MBS pools are relatively interchangeable. The TBA process increases the liquidity of the MBS market by taking thousands of different MBS with different characteristics and trading them through a handful of contracts. Buyers and sellers of TBA transactions agree on these parameters: issuer, maturity, coupon, price, nominal amount and settlement date.

Each type of agency transfer title is assigned a trade settlement date for each month. Trading counterparties are required to exchange pool information no later than 3:00 p.m. EST, 48 hours prior to the established settlement date. Trades are divided into lots of $1 million.

The TBA market is the second most traded secondary market after the US Treasury market.

Special considerations: business risks to be determined

Due to the forward settlement nature of the investment, the risk of counterparty default is present during the period of time between trade execution and actual settlement. The risk associated with this form of default is that, particularly in highly volatile markets, the non-defaulting party will not be able to enter into an agreement on similar terms once the defaulting party’s intentions become known. The risk can be mitigated by assigning collateral to the transaction, although not all companies have immediate access to collateral management services.

In January 2014, when average daily trading volumes on the TBA market reached over $186 billion, the Financial Sector Regulatory Authority (FINRA) has established margin requirements designed to help reduce risk for TBA trades with longer settlement dates. This rule only applies to specific individuals or institutions and is not considered necessary for transactions with short settlement times.

Other uses of TBA

“To be announced” may refer to other circumstances that do not involve the bond markets. In these cases, TBA is most often used interchangeably with TBD, or “to be determined”. Whenever there is upcoming information that is scheduled to be released, but the exact time or date has not been set, it may appear as “TBA”. For example, a company may set its annual shareholders’ meeting for the spring of the following year, with the exact date and location TBA until it is finalized.

Likewise, “TBA” may be used as a placeholder for dates or other yet-to-be-determined information for shipping and logistics purposes, pending headlines, or personnel changes. For example, a company may want to hire a new manager, with the successful candidate to be determined once negotiations are complete.

Frequently Asked Questions

Does TBA mean anything different in finance?

In the world of bond trading, TBA is used in particular to describe a situation where certain mortgage-backed securities are traded but details of the securities are not announced until a later time. Buyers and sellers of TBA transactions agree on a few necessary parameters such as issuer maturity, couponthe price, through amount and date of payment. The specific securities involved in the transaction are announced 48 hours before settlement.

What is the difference between TBA and TBD?

Outside of the MBS market, “to be announced” and “to be determined” are often used interchangeably and mean the same thing. More technically, TBA (i.e. pending announcement) should occur after something has already been determined, so it will always follow a TBD status. For example, a company may wonder if it should acquire a business, which makes it to be determined. Once this decision is approved, the status may change to TBA until it has been officially announced to shareholders.

When are MBS transactions described as TBA?

A Notifiable Trade (TBA) is basically 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, which means that the underlying mortgages are not known to the parties. This data exclusion is because the TBA market assumes that MBS pools are more or less interchangeable. This interchangeability facilitates exchanges and liquidity.