Both methods reach the same net position. Only one of them closes the exposure, releases the collateral, and does it in a single transaction.
A manager opens and closes TBA positions through the month. Best execution means the closing trade is often with a different dealer than the opening one, so the two sides cannot simply pair off. What happens next is a choice, and the choices are not equivalent.
Same counterparty, both sides. Positions offset, trades come off the books, only the price difference settles.
Different counterparties. One trade is assigned so the position is extinguished rather than carried. Only the net moves.
Offsetting trades are created to reach the same net. Each leg is a real transaction that stays open until settlement date.
The forward-settling nature of agency MBS leaves both parties exposed to credit risk between trade date and settlement. That is the whole reason the Treasury Market Practices Group recommended margining forward-settling agency MBS in 2012, and the reason the market has been working toward central clearing since.
Every leg remains a live obligation until settlement date. The net economics may be flat, but each counterparty in the chain is still exposed to each other counterparty for the full term.
The gross positions come off when the assignment completes. What remains outstanding to settlement date is the net difference, not the full value of either side. If a counterparty runs into trouble, the amount at risk is a fraction of what it would otherwise have been.
Exposure is not free. Since 22 May 2024, FINRA Rule 4210 has required members to collect variation margin on Covered Agency Transactions, which include TBAs settling later than T+1. An open position is a margin obligation.
Legs stay open, so they stay marked, and the collateral that supports them stays posted until settlement date. Capital that could be working sits against a position that exists only to reach a net.
Margin follows exposure. With the gross positions closed, what gets marked is the net difference, so the collateral requirement scales to the real economics rather than to the notional of both legs.
Take $100 million par bought at 102-00 and sold at 102-08. The economics are eight 32nds, or $250,000. What actually moves to transfer that depends entirely on the method.
A round robin settles each leg on its own terms, so roughly $102 million moves one way and $102.25 million the other, in order to transfer $250,000 of actual economics.
An assignment settles the difference and nothing else. One transaction, sized to the actual economics rather than to the notional of each leg.
Every additional transaction carries a processing fee, and pool allocations carry EPN message fees. Assignments avoid the allocations entirely, so there are no pools to turn and no messages to pay for.
Portfolio accounting, custody and third-party administrators all reconcile what was booked. Underlying clients see it in their statements. Trades created only to reach a net offset are activity nobody needed.
When offsetting is cheap, transaction cost does not have to be weighed in dealer selection. The desk executes where the execution is best, not where the clean-up is easiest.
If assignments win on all three counts, the obvious question is why desks reach for round robins at all. The answer is operational, not economic.
An assignment is a five-page legal document. Historically it is drafted by hand and chased by email or fax. SIFMA rules allow up to 12 hours for it to reach the third dealer, and firms send when they process, so the delay often runs the full window. Late assignment reporting has been a persistent source of risk in this market for exactly that reason.
TBA Mortgage Master generates and delivers the assignment within seconds of the offset. Notifications go out automatically and every digital assignment is stored for future reference. AFS remains the first and only vendor with Assignment-of-Trade automation. When the efficient method is also the easy one, desks use it.
We will walk through a month of your TBA offsets and where the exposure, collateral and transactions are going.
