CME Offers First TBA Futures for Mortgage Backed Securities06.23.2022
CME Group, the world’s leading derivatives marketplace, announced it will expand its suite of long-term interest rate products to offer the first-ever 30-Year Uniform Mortgage-Backed Securities (UMBS) TBA futures contracts on October 3, pending regulatory review.
“Our new 30-Year UMBS TBA futures contracts will provide the mortgage-backed securities market with access to a liquid, risk management tool to hedge their risk in a more capital efficient way,” said Agha Mirza, CME Group Global Head of Rates and OTC Products. “This is a significant step in the expansion of our suite of interest rate products, which will enable clients to benefit from the ability to access UMBS TBA futures alongside our deeply liquid U.S. Treasury and short-term interest rate futures and options.”
The vast majority of residential mortgages in the U.S. are securitized through the agency mortgage-backed securities (MBS) market, which is the second-largest debt market in the U.S. behind U.S. Treasuries. These securities can be pooled together and traded as forwards in the existing TBA market to provide greater liquidity for participants, like mortgage lenders. In June of 2019, Fannie Mae and Freddie Mac standardized their MBS offerings into what became known as UMBS. During the last 4 quarters (Q2 2021-Q1 2022), the UMBS TBA market had a daily volume of $195 billion, representing 80% of overall TBA volumes per FINRA Trace and NY Fed data.
The 30-Year UMBS TBA futures contracts will be fulfilled by delivery of TBAs cleared by the Fixed Income Clearing Corporation’s Mortgage-Backed Securities Division, a subsidiary of The Depository Trust & Clearing Corporation (DTCC). The contracts will offer mortgage lenders, issuers, servicers and other participants an exchange-traded and centrally cleared tool for price discovery and risk transfer. The futures will represent 30-year residential mortgages pooled into UMBS products backed by Fannie Mae and Freddie Mac. For each delivery month, futures will be listed for delivery of a small number of specified active mortgage coupon rates 2.0%, 2.5%, 3%, 3.5%, 4%, 4.5% and 5%. The three nearest calendar months will be listed at any given time, beginning with the November 2022 contract.
Available to trade on CME Globex and subject to the rules of CBOT, the 30-Year UMBS TBA futures will be cleared by CME Clearing and receive automatic margin offsets against existing interest rate futures upon launch. These contracts will become eligible for portfolio margining against other cleared interest rate swaps and futures after launch.
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