Jottings - January 16, 2013
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As we begin the second half of the first month of 2013, it is time to get back into this all important tidbit of information feed. Top of the list? The cash/margin consequence of the TBA market. It seems that this issue looms larger when interest rates are falling. Why? Mortgage banker volumes always increase requiring additional TBA capacity (in other words, scrambling for lines) plus the positions that you do have on are moving against you and thus, dealers want skin in the game. The driving force behind the cash and "skin in the game" is the relationship between your broker/dealer and their clearing firm and the MBS division of the Fixed Income Clearing Corp. To attempt to simplify how things work, the clearing corp looks at the net position of the member clearing firm and says you owe us "X" dollars. The clearing firm then breaks this down and says to each broker/dealer that clears through that clearing firm, because of your net position with us, you need to send in "X" dollars. Now it gets a little tricky. Based on the financial strength of each broker/dealer, the BD now decides on the "X" dollars they will require from you. It now becomes pretty arbitrary when it comes to each customer and BD. Basically, if you the mortgage banker has the financial strength, the BD will cover all your cash requirements up to a "Y" size position. Sometimes they will say we want you to post $200,000 to get a $10,000,000 or $12,000,000 TBA line, but do not worry about negative market movement. We will cover that. Bottom line, the overall market is still lacking a universal solution. A solution that is similar to the Futures market.
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Here is a link to a news article you may want to look at if you want to see the big word nitty gritty of the battle going on regarding who is better qualified to oversee the financial performance of the derivative market.
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I am seeing a common denominator to many dealers that if you have a MBS account without margin, the hidden cost is an additional 64th or 32nd in lower price for a bond bid (156.25 to 312.50 per 1mm). Let's say you are trading $20,000,000 per month. The cash deposit required to trade this amount is $600,000. At a 32nd hidden cost, your revenue is reduced by $6,250 per month. Annualized this is $75,000 giving you an implied cost of funds of 12.5%. The question to you is very basic: Can you find available cash that reduces this hidden source of capital cost?
I always enjoy a good debate and conversation. Reach out if you want the rest of the story.
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