FRBNY Economic Policy Review / May 2013 9
3.6 Price Discovery and Transparency
TBA trading occurs electronically on an over-the-counter basis,
primarily through two platforms, DealerWeb (for interdealer
trades) and TradeWeb (for customer trades).
25
Quotes on
DealerWeb are “live,” in the sense that dealers must trade at their
posted prices if a counterparty wishes to do so. The TradeWeb
platform continuously provides indicative bids and offers
(known as Composite Market indicators) for each agency MBS
coupon, offering investors “real-time” estimates of the prices at
which trades can be executed. While these quotes are indicative,
internal Federal Reserve analysis shows that the quotes generally
track prices of completed transactions closely.
Since May 2011, market participants that are members of the
securities self-regulatory body FINRA (the Financial Industry
Regulatory Authority) have been required to report agency
MBS trades to the FINRA TRACE (Trade Reporting and
Compliance Engine) system. After each trading day, FINRA
publicly reports summary statistics of trading volumes and
prices for trades completed during the day, such as the weighted
average transaction price for different coupons, issuers, and
settlement months, and the number and volume of trades.
26
Current coupon MBS prices and spreads between yields on MBS
and other assets are also available on Bloomberg and Reuters.
These different data sources allow market participants to obtain
timely estimates of current market prices for TBA contracts.
The TRACE data also illustrate the concentration of
MBS trading activity in the TBA segment. According to these
data, for calendar year 2011 TBA trading volume (including
stips and dollar rolls) is sixteen times larger than trading in
specified pools (including pass-through and collateralized
mortgage obligation pools), and 187 times larger than trading
in non-agency MBS. It is also common to observe trades in the
TRACE data exceeding $100 million.
27
Within the TBA segment, FINRA’s TRACE summary reports
do not break down the relative volumes of dollar rolls and
outright trades; however, as a guide, TradeWeb data analyzed by
the Federal Reserve Bank of New York suggest that, on average
25
Although agency MBS are not exchange-traded, TBA trades are subject to
centralized clearing through a centralized counterparty operated by the
Depository Trust and Clearing Corporation.
26
For the most recent daily report, visit www.finra.org/Industry/Compliance/
MarketTransparency/TRACE/StructuredProduct/. Historical summary
statistics (by trading day) based on these data are reported by SIFMA at
www.sifma.org/research/statistics.aspx.
27
See Atanasov and Merrick (2012) and Friewald et al. (2012) for a more
detailed analysis of agency MBS TRACE data.
TBA trading occurs electronically
on an over-the-counter basis.
over 2010 and 2011, 58 percent of thirty-year Fannie Mae trading
volume was part of a dollar roll or swap transaction.
3.7 Settlement Volumes
In practice, most TBA trades do not ultimately lead to
a transfer of physical MBS. In many cases, the seller will
either unwind or “roll” an outstanding trade before maturity,
rather than physically settle it. Furthermore, as part of the
settlement process, a centralized counterparty operated by
the Depository Trust and Clearing Corporation nets all
offsetting trades that have been registered with it, greatly
reducing the value of securities and cash that must change
hands between TBA counterparties.
Even so, TBA trading still generates a large volume of
physical MBS settlement. We have conducted some
preliminary analysis using Fedwire Securities Service data
for the first calendar quarter of 2012 to try to quantify
these volumes. During this period, average daily agency
MBS settlement volume was $94 billion, representing a mix of
TBA, dollar roll, stip, and specified pool transactions. Notably,
the three dates with the highest settlement volume
corresponded exactly to the three Class A TBA settlement dates
in the three-month period. Settlement volume on these dates
averaged $418 billion, more than four times the overall daily
market average. This evidence suggests that, even though the
TBA market is by its nature subject to adverse selection, it is still
used as a vehicle for transacting large volumes of physical
agency MBS—most likely because of its liquidity.
3.8 Legal Basis of TBA Trading
From a legal perspective, the TBA market, as it currently
operates, is made possible by Fannie Mae’s and Freddie Mac’s
exemption from the registration requirements of the Securities
Act of 1933 with respect to sales of their MBS. This exemption
allows newly issued agency MBS to be offered and sold
(including in TBAs) without registration statements filed with
the Securities and Exchange Commission (SEC). In contrast,
public offers and sales of newly issued private-label MBS are
subject to the registration requirements of the Securities Act.
Sales of newly issued agency MBS by way of TBA trading
would not be possible without such an exemption because, at
the time of a TBA trade, the securities that will eventually be
delivered often do not exist. Even if they do exist, the buyer
is not told the identity of the specific securities that will be
delivered until two days before settlement, which is usually
significantly after the trade date itself. Indeed, for many MBS
delivered to fulfill TBA contracts, the underlying mortgages