What is a '48-Hour Rule '

The 48-hour rule is a requirement that sellers of to-be-announced mortgage-backed securities (MBS) communicate all pool information regarding the transactions to buyers before 3 p.m. EST 48 hours before the settlement date of the trade. The Securities Industry And Financial Markets Association (SIFMA) enforces this rule. SIFMA was formerly known as the Public Securities Association or Bond Market Association.

BREAKING DOWN '48-Hour Rule '

The 48-hour rule was created to bring transparency to to-be-announced (TBA) trade settlements. The TBA market deals with mortgage-backed securities (MBS). At the time a TBA trade is made, the specific MBS that the seller will deliver to the buyer is not designated.

A TBA trade is effectively a contract to buy or sell mortgage-backed securities (MBS) on a specific date. It does not include information regarding the pool number, the number of pools or the exact amount involved in the transaction. This exclusion of data is due to the TBA market assuming that MBS pools are more or less interchangeable. 

The TBA process benefits buyers and sellers because it increases the liquidity of the MBS market by taking thousands of different MBS with different characteristics and trading them through a handful of contracts. Buyers and sellers of TBA trades agree on a few necessary parameters such as issuer maturity, coupon, price, par amount and settlement date. The specific securities involved in the trade are announced 48-hours before the settlement.

Assume that the agreed upon settlement date between the buyer and the seller is July 14. The 48-hour rule requires that on July 12 by 3 p.m. EST the seller will have informed the buyer of the exact details of the MBS that will be delivered on July 14. This two-day period is also known as the 48-hour day.

Mortgage-Backed Securities

An MBS is a bond that is secured, or backed, by mortgage loans. Loans with similar traits are grouped to form a pool. The pool is then sold to stand as collateral for the associated MBS. The issuance of interest and principal payments to investors is at a rate based on the principal and interest payments made by the borrowers of the underlying mortgages. Investors receive interest payments on a monthly basis rather than semiannually.

The TBA market was established in the 1970s to facilitate the trading of MBS issued by Fannie Mae, Freddie Mac, and Ginnie Mae. It allows mortgage lenders to hedge their origination pipelines. The TBA market is the most liquid secondary market for mortgage loans, resulting in high levels of market activity. In fact, the amount of money traded on the TBA market is second only to the U.S. Treasury market.

RELATED TERMS
  1. Drop

    A drop is the price difference between when an investor sells ...
  2. MBS Pool Number

    An MBS pool number is a number or alphanumeric character assigned ...
  3. Agency MBS Purchase

    Agency MBS purchase is most commonly used to refer to the U.S. ...
  4. Vintage

    Vintage is a slang term used by mortgage-backed securities (MBS) ...
  5. Mortgage-Backed Security (MBS)

    A mortgage-backed security is a type of asset-backed security ...
  6. Original Face

    Original face is the total outstanding balance when a mortgage-backed ...
Related Articles
  1. Investing

    Profiting Off of Increased Mortgage Rates (PTRIX,FMSFX,VMBSX)

    Learn why mutual funds that invest in mortgage-backed securities (MBS) are worth a look for investors wanting to capitalize on rising mortgage interest rates.
  2. Investing

    Top Mortgage-Backed Securities ETFs

    Investing in mortgage-backed securities has many advantages, but studying their history may make you wary.
  3. Insights

    The Mortgage-Backed Security Market Faces Major Tumoil

    The Fed is expected to begin selling off its $1.75 trillion portfolio of mortgage-backed securities.
  4. Personal Finance

    Profit From Mortgage Debt With MBS

    Mortgage-backed securities can offer monthly income, a fixed interest rate and even government backing.
  5. Investing

    A Smart Idea for Mortgage Bonds

    This old mortgage bond ETF is undergoing a transformation – and getting cheaper.
  6. Insights

    Potential Impact of Fed’s Balance Sheet Reduction

    The Fed has started to unwind its balance sheet. Here's what that means and the potential impact.
  7. Investing

    3 ETFs to Take Advantage of Increased Mortgage Rates (REM, VMBS)

    Obtain a comparative review and analysis of three of the top-performing ETFs that are poised to generate profits from increased mortgage interest rates.
  8. Investing

    Find Security In Covered Bonds

    Find out about a safe investing alternative that could have prevented the subprime meltdown.
  9. Investing

    The Ins And Outs of Seller-Financed Real Estate Deals

    There's more than one way to buy or sell a house. Seller financing presents yet another unique option.
  10. Investing

    The Risks Of Mortgage-Backed Securities

    Find out how weighted average life guards against prepayment risk.
RELATED FAQS
  1. Why do MBS (mortgage-backed securities) still exist if they created so much trouble ...

    Read several different arguments in favor of allowing the trade of mortgage-backed securities, even after the financial crisis ... Read Answer >>
  2. What is securitization?

    Securitization involves taking an illiquid asset, or group of assets, and transforming it into a security. A typical example: ... Read Answer >>
  3. What is the 1003 mortgage application form?

    Learn about the 1003 mortgage application form, what information it requires and why this form is the industry standard for ... Read Answer >>
Hot Definitions
  1. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  3. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  4. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  6. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center