ICE/Ellie Mae Primary Mortgage Rate Lock Futures Markets are Up and Streaming—Open to Trade
Ellie Mae gathers >40% of daily rate lock data for Conventional 30 year (FN/FHR) and Jumbo 30 year. The rate reported is generated as an Annual Percentage Rate. The loan-balance-weighted average APR is reported next-business-day. The last five-ish years of data for both the conventional and jumbo silos can be found on Bloomberg via:
- Conventional: LRC30APR<Index>
- Jumbo: LRJ30APR<Index>
The acronyms on Bloomberg for the TRADE-ABLE Futures are:
- Conventional: VAIA <Comdty> CT <Enter>
- Jumbo: VJIA<Comdty>CT<Enter>
The symbology on Refinitiv is:
- Conventional: <0#C30C:>
- Jumbo: <0#SJO:>
Looking at the Conventional Future on Bloomberg, we see:
Both Conventional and Jumbo trade at a price: 100 – Futures Price = Implied Primary Rate. The July’22 future shows 93.805 X 93.82. In rate terms, 6.195% @ 6.180%. The futures settle on SIFMA settle dates (July 14, 2022 here), so the ‘proposition’ is: “Where will the all-inclusive PRIMARY conventional rate be on July 14?” The ‘all-inclusive’ means pass-through rate + servicing + G-Fee + xxx; the actual all-in borrower APR. All contracts that are not rolled, CASH settle (nothing to deliver) to the Ellie Mae posted value for settle date.
Each RL futures contract has a tick value (bp value) of a FIXED $50/basis point. Unlike TBA and other mortgage product, this future is non-convex. Since the sole determinant of settlement value is the Ellie Mae APR, there is no fixed coupon, no cheapest-to-deliver, no WAM—this is a straight PRIMARY RATE product. A change in futures price from 93.80 to 93.81 results in $50 P&L (gain for the long, loss for the short). Someone in Secondary/Pipeline risk management will likely be SHORT these futures to hedge ‘rates up’. A trader on the MSR side will likely be LONG these contracts to hedge ‘rates down’.
Because there is NO ‘fixed coupon’ nor a physical loan delivery, the drop more closely emulates the financing curve (amortizing SOFR) than anything like TBA. Month-to-month is much flatter.
For SECONDARY/Conventional, this is a huge opportunity. If your deliveries into UMBS (like most) are <10%, these futures offer an alternative to substantially cut the drop cost via cross hedging. Of course, the product is non-convex/linear, so the risk profile is different. While each pipeline risk management team will have their own view, I suspect over time that the Conventional Rate Lock futures become a meaningful percentage of total hedge. When drops are steep, the RL product is highly enticing. When drops flatten, percentage of RL hedge likely declines.
For SECONDARY/JUMBO—there is finally a functional hedge vehicle with visibility out the curve for primary jumbo rates. Current forward Jumbo looks like this:
For SECONDARY/Extended Rate Locks/Builder Forwards/Lock’n’shop—there is now a product that will get you out the curve further than the TBA stack. Ask FIG about combining options with this product.
For MSR hedgers—Finally, a PRIMARY RATE hedge vehicle! Straight up DV’01 match—no key rate buckets. No convexity mis-match. Way cheaper than CMM.
For those with flexibility to use a new product, it’s time to get involved. When there is sufficient liquidity and open interest in these futures, OPTIONS will be listed. Monthly cash-settle means no ‘getting trapped’ in a new product. As always, everyone should determine the appropriateness of any risk transfer vehicle for their institution. If you use a 3rd Party Risk Management system, please contact your vendor and tell them to get this product into their software.
While the notional value of the future is shown at $500,000, this value is a function of the fixed $50/bp contract construction. Crudely, each 1 RL Future is closer to $100k of new production UPB. If your risk management system calculates the DV’01 (rate sensitivity) of a loan at $450/$1million, your hedge ratio is: $450/$50 = 9 RL Futures per $1million loans. If you need $50,000 in DV’01 coverage on MSR risk, you calculate $50,000/$50 = 1,000 RL futures. Often, Jumbo will be analyzed at faster prepay speeds and shorter durations/lower dv’01s. So, a new production Jumbo may have $350 per $1million face in dv’01– thus, $350/$50 = 7 Jumbo RL futures.
Call the RJO Fixed Income Group desk (800-367-3349) or email us at FIG@rjobrien.com to set up a call or to ask any questions.
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