A TBA transaction is an agency MBS forward trade that fixes general security terms while allowing eligible pools to be identified before settlement.
A to-be-announced transaction (TBA transaction) is a forward trade in eligible agency mortgage-backed securities in which the parties agree on general delivery characteristics but do not identify the exact pools on the trade date. The seller allocates qualifying pools before settlement under market delivery rules.
TBA does not mean the economic terms are unknown. Price, par amount, issuer or agency program, coupon, maturity category, and settlement are agreed; the exact pool identifiers remain open until allocation.
The principal contract terms generally identify:
The applicable market conventions and good-delivery rules determine which pools can satisfy the contract. The specific CUSIPs and pool numbers are provided during the allocation process before settlement.
TBA securities may not yet exist when the original trade is made. This supports forward sales by mortgage originators and issuers that expect to create eligible pools before settlement.
Assume a buyer agrees to purchase $10 million par of an eligible agency MBS TBA at 99-16.
In 32nds notation:
$$ 99\text{-}16 = 99 + \frac{16}{32} = 99.50 $$
Simplified principal consideration is:
$$ $10{,}000{,}000 \times 99.50% = $9{,}950{,}000 $$
Actual settlement also depends on allocated pools, current factors, accrued interest, market conventions, and operational adjustments.
Suppose the TBA price falls to 98-24 before settlement:
$$ 98\text{-}24 = 98.75 $$
The simplified mark-to-market change on $10 million is:
$$ $10{,}000{,}000 \times (98.75% - 99.50%) = -$75{,}000 $$
The buyer has a $75,000 adverse price move before settlement, excluding carry, financing, margin, transaction costs, and other adjustments. A forward settlement date does not defer economic price risk.
Agency MBS pools contain many different loans and identifiers. Requiring every trade to name pools immediately would fragment trading across a very large inventory.
TBA eligibility and delivery rules make qualifying pools sufficiently interchangeable for contract purposes. This fungibility allows market participants to trade forward exposure using a smaller set of standardized contracts.
The trade-off is delivery flexibility. The seller generally has an incentive to deliver eligible pools that are less valuable to retain, and TBA pricing reflects the expected quality of deliverable collateral.
| Feature | TBA | Specified pool |
|---|---|---|
| Exact pool at trade | Not identified | Identified |
| Standardization | High | Pool-specific |
| Seller delivery option | Material within eligibility rules | Named pool must be delivered |
| Main pricing unit | Standardized contract | TBA benchmark plus or minus pool-specific value |
| Analysis | Contract, delivery universe, rates, prepayment, settlement | Loan and pool characteristics plus TBA-relative pay-up |
Specified pools can trade at a pay-up when investors value collateral expected to prepay more favorably than generic TBA delivery.
Mortgage lenders often commit rates to borrowers before loans close and before those loans can be sold or securitized. TBA forward sales can help manage the risk that MBS prices change while loans move through the origination pipeline.
This hedge is imperfect. Actual fallout, loan characteristics, execution, basis, pair-off costs, and delivery eligibility can differ from assumptions. TBA liquidity supports risk transfer, but it does not remove pipeline or model risk.
A market participant may close an existing TBA position and establish a similar position for a later settlement month. This is commonly associated with a dollar roll, whose economics depend on the price difference between months and the value of principal and interest not received during the roll period.
A pair-off closes offsetting purchase and sale obligations rather than completing physical delivery. These practices have contractual, financing, accounting, tax, margin, and operational consequences that require transaction-specific analysis.
TBA prices change with rates, curve shape, volatility, MBS spreads, supply, demand, and Federal Reserve or private market activity.
Expected borrower refinancing and principal timing affect price and duration. Duration can shorten when rates fall and extend when rates rise.
The buyer does not choose the exact pools at trade time. Delivered collateral may have less favorable expected prepayment behavior than premium specified pools.
Forward exposure can require margin and creates replacement-cost risk if a counterparty fails. Applicable agreements, clearing, and collateral arrangements matter.
Allocation, factors, CUSIPs, current face, trade matching, netting, and payment must be completed under tight market timelines.
A TBA hedge may not move exactly with mortgage rates, whole loans, specified pools, servicing rights, or another MBS class.
Liquidity varies by issuer, coupon, maturity, settlement month, and market conditions. A standardized market can still become volatile or costly to exit.
This article provides general financial education, not individualized investment, trading, hedging, tax, legal, accounting, margin, or settlement advice. TBA obligations depend on current market rules and transaction agreements.