To Be Announced (TBA) in Business and Finance: Origins, Applications, and Risks

To be Announced, commonly known as TBA, holds a pivotal role in the realm of bond trading, particularly within the mortgage-backed securities (MBS) market. This article serves as your gateway to comprehending TBA from its origins to its applications, shedding light on why it matters in the world of finance.

TBA signifies forward-settling trades of pass-through securities issued by entities such as Freddie Mac, Fannie Mae, and Ginnie Mae. The unique aspect of TBA transactions is that they do not specify the exact mortgage-backed security that will be delivered to fulfill the trade when the trade is initially made. Instead, the announcement of these securities occurs 48 hours before the agreed trade settlement date.

TBA in bond trading represents a contract to either buy or sell an MBS on a specified date. However, the distinguishing feature of TBAs is their absence of specific information regarding the pool number, number of pools, or the exact amount involved in the transaction. To understand this better, let’s delve into how MBSs function.

MBSs are bonds that are secured by mortgage loans. These loans, which share similar characteristics, are grouped together into pools. These pools are then sold to serve as collateral for the associated MBS. Investors who hold MBSs receive interest and principal payments based on the payments made by the borrowers of the underlying mortgages. Unlike some bonds that pay interest semiannually, MBS investors typically receive monthly interest payments.

The TBA market assumes that MBS pools are relatively interchangeable. This assumption forms the foundation of the TBA process, enhancing the overall liquidity of the MBS market. In this market, thousands of different MBSs with varying characteristics are traded through only a handful of standardized contracts. When engaging in TBA trades, buyers and sellers agree on several crucial parameters, including issuer, maturity, coupon, price, par amount, and settlement date.

Each type of agency pass-through security is allocated a trade settlement date for each month. To ensure smooth transactions, trade counterparties must exchange pool information by 3 p.m. (EST), 48 hours before the established settlement date. Traditionally, TBA trades are allocated in $1 million lots.

One of the primary risks associated with TBAs is the potential for counterparty default during the period between trade execution and actual settlement. This risk becomes particularly pronounced in highly volatile markets. The concern here is that, once the intentions of the defaulting party become known, the non-defaulting party may face difficulties securing a deal with similar terms. While some parties attempt to mitigate this risk through collateral assignment, it’s important to note that not all firms have immediate access to collateral management services.

In January 2014, as average daily trading volumes in the TBA market exceeded $186 billion, the Financial Industry Regulatory Authority (FINRA) introduced margin requirements designed to reduce risks, especially for TBA transactions with longer settlement dates. These margin requirements, however, apply to specific individuals or institutions and are not considered necessary for transactions with shorter settlement periods.

Apart from its significance in bond markets, “To Be Announced” finds utility in diverse contexts. Often used interchangeably with “To Be Determined” (TBD), it signifies upcoming information scheduled for release, albeit without a precise time or date.

For instance, a company may schedule its annual shareholders’ meeting for the Spring of the following year, with the exact date and location listed as TBA until they are finalized. Similarly, TBA can serve as a placeholder for dates, logistical details, pending news headlines, or even personnel changes. For example, a company may intend to hire a new manager, with the successful candidate’s name listed as TBA until negotiations are complete.

In the world of bond trading, TBA is used to describe situations where certain mortgage-backed securities are traded without specifying the details until 48 hours before the settlement. Buyers and sellers of TBA trades agree on essential parameters, including issuer, maturity, coupon, price, par amount, and settlement date.

Outside the MBS market, “To Be Announced” and “To Be Determined” are often used interchangeably and convey the same meaning. Technically, TBA, representing a pending announcement, should follow something that has already been determined, making it a subsequent status to TBD. For instance, a company might ponder whether to acquire another company (TBD), and once the decision is approved, it becomes TBA until officially announced to shareholders.

A “To Be Announced” (TBA) trade is essentially a contract to buy or sell mortgage-backed securities (MBS) on a specific date. However, it lacks specific information about the pool number, the number of pools involved, or the exact amount in the transaction. This absence of data is because the TBA market assumes that MBS pools are relatively interchangeable, which aids in trading and enhancing liquidity.