In current practice, in the fixed-rate market, TBA securities, or coupons, are the whole and half coupons of the mainstay 30- and 15-year programs, as well as the 10- and 20-year GSE pools. The term TBA means that the actual pools delivered to settle the trade are "to be announced."20 Actual pool numbers are provided within 48 hours of the delivery date; those notification or "allocation" dates are set by the BMA. Unlike other fixed income securities, including CMOs and other structured products that settle a defined number of days after the trade, TBA pass-throughs
20. Those terms are resolved in the pool notification process, which must take place at least 48 hours before delivery. Cutoff times are set by the Bond Market Association, along with standard requirements for delivery on settlements of agency pass-throughs. The chief of these are numbers of pools and variance between trade amount and the current principal balance of pools delivered. The requirements for TBA trading are spelled out in the Uniform Practices Manual.
settle once a month, roughly midmonth.21 This practice evolved in the early days of agency securitization to accommodate the fact that originators want to sell forward to hedge their pipelines (lock in the prices at which they are originating loans) but cannot predict to a round number the actual principal amount of closed loans going into a pool. (It also follows that pool numbers would not be known.) The practice of trading new pools TBA enlarged quickly to include existing pools, permitting dealers to sell pass-throughs in response to investor inquiry without owning or having to quickly buy them from another investor or dealer.
However, the WAC and WAM assumed for a TBA coupon are not necessarily the weighted average of WAC and WAM of all Ginnie II 5.5s (the generic). Instead, they are the WAC and WAM of the pools most likely (cheapest) to be delivered to settle the trade. Because these assumptions are a matter of judgment and recent settlement experience, they can vary somewhat across broker-dealers. This is an important consideration when analyzing relative value: Measures such as OAS are very sensitive to WAM and somewhat sensitive to WAC (for a given coupon). In some cases, the TBA assumptions can determine whether TBA is a "pick" or "give" in spread to a CMO or another TBA. They also can cause a TBA coupon to look rich in one firm's research and cheap in another's.
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