What Is the 48-Hour Rule?
Let me explain the 48-hour rule directly: it's a requirement for sellers of to-be-announced (TBA) mortgage-backed securities (MBS) to share all pool information about the MBS with buyers before 3 p.m. Eastern Time, exactly 48 hours before the trade's settlement date. The Securities Industry and Financial Markets Association (SIFMA) enforces this rule, and you might recall SIFMA was previously known as the Public Securities Association or Bond Market Association.
Key Takeaways
You need to know that the 48-hour rule is part of the mortgage allocation process for buying and selling TBA MBS. It requires the seller to notify the buyer of the details of the underlying mortgages in the MBS by 3 p.m. Eastern Time, 48 hours before settlement. SIFMA handles the enforcement. When MBS are traded in the secondary market, the underlying mortgages aren't known at first, which actually helps with trading and liquidity. At the time of trade, parties agree on basics like price, par, and coupon, but not the specific mortgages. Remember, the TBA market is the second most traded secondary market right after the U.S. Treasury market.
Understanding the 48-Hour Rule
An MBS is a bond backed by mortgage loans, where loans with similar characteristics are pooled and sold as a security to investors. Payments of interest and principal go to investors based on what borrowers pay on those underlying mortgages, and you get interest monthly, not semiannually.
A TBA trade is basically a contract to buy or sell MBS on a specific date, without details like pool number, number of pools, or exact transaction amount, meaning the underlying mortgages remain unknown. This setup assumes MBS pools are interchangeable, which facilitates trading and liquidity.
The 48-hour rule fits into the mortgage allocation process, where underlying mortgages are assigned to a specific MBS, and it was created to add transparency to TBA trade settlements. Specifically, the seller must inform the buyer of the mortgages in the MBS 48 hours before settlement. With the standard T+3 settlement, this notification usually happens the day after the trade is executed.
The 48-Hour Rule as Part of the TBA Process
The TBA process helps both buyers and sellers by increasing MBS market liquidity, allowing thousands of different MBS with varying characteristics to be traded through just a few contracts. In these trades, you agree on parameters like issuer maturity, coupon, price, par amount, and settlement date, with the specific securities announced 48 hours before settlement.
This market started in the 1970s to ease trading of MBS from Fannie Mae, Freddie Mac, and Ginnie Mae, letting mortgage lenders hedge their origination pipelines. The TBA market is the most liquid secondary market for mortgage loans, with trading volume second only to the U.S. Treasury market.
Example of the 48-Hour Rule
Suppose Company ABC decides to sell an MBS to Company XYZ, and Company XYZ agrees, with the sale happening on Tuesday. At that point, neither knows the underlying mortgages in the MBS. With T+3 settlement, the trade settles on Friday, so under the 48-hour rule, Company ABC must notify Company XYZ of the mortgage allocations by Wednesday before 3 p.m. Eastern Time.
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