Reducing TBA-MBS Trade Fails


Through conversations with major asset managers, Tradeweb leveraged its dealer-to-customer marketplace to create a proprietary electronic solution to help reduce the likelihood of systemic “daisy chain” or “round robin” fails. 



Since the onset of the financial crisis, the to-be-announced mortgage-backed securities (TBA-MBS) market has faced an unusual set of challenges. Led by an absence of supply, investors faced a difficult trading environment amid low levels of mortgage origination while the Federal Reserve MBS Purchase Program began reducing the available inventory of TBA-MBS in the secondary market. 

The Fed eventually completed the first round of TBA buying in March 2010 as the industry witnessed an estimated $1.25 trillion in supply removed from the system. And though the program successfully lowered 30-year mortgage rates for U.S. homeowners, these conditions began to result in significant failed deliveries of mortgage pools for many institutional market participants who now had limited access to liquidity

This trading environment became even more taxing for investors on February 1, 2012 when the Treasury Market Practices Group within the Fed implemented a new fail charge for firms that failed to deliver pools to satisfy these trades. After the expiration of an initial grace period, dealers are now fined zero to two percent of the notional volume of a failed TBA-MBS trade.

Through conversations with major asset managers, Tradeweb leveraged its dealer-to-customer marketplace to create a proprietary electronic solution to help reduce the likelihood of systemic “daisy chain” or “round robin” fails. The new solution allows customers to “step out” of offsetting trades in the same instrument where the pool delivery obligations are the same, decreasing the number of counterparties and overall risk in the TBA-MBS market.

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Tradeweb Markets is a world leader in building and operating electronic over-the-counter marketplaces. Since 1998 the company has helped transform the way that business gets done in the fixed income and derivatives markets.