Both methods reach the same net position. Only one of them closes the exposure, releases the collateral, and does it in a single transaction.
When the buy and the sell are with the same counterparty, there is no decision to make. The trades pair off, the positions come off the books, and only the price difference settles. But best execution means the closing trade is often with a different dealer than the opening one, and at that point you have a choice.
Two offsetting trades are booked at mid market. They are real market trades at a real market price, and because the mid sits between your two executions, each dealer ends up holding part of the difference.
Two offsetting trades are booked as well, but at your original execution prices rather than at mid. One dealer goes flat, the whole difference lands with the other, and it settles once.
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.
Because the closing trades go on at the current mid, neither dealer nets to zero. You are owed $375,000 by one and owe $125,000 to the other, and both of those balances sit there until settlement date. Two counterparty relationships stay live instead of one, and if either fails in between, it is your problem.
Booking at the original execution price takes one dealer flat. You are out with them the moment the assignment completes, leaving a single $250,000 balance against one counterparty to carry to settlement date instead of two balances against two.
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.
Posting and managing collateral against two dealers instead of one costs both human and cash capital. Two positions to mark, two sets of movements, and their own wire instructions each time cash is pledged.
Closing one dealer out entirely removes that relationship from the margin picture, and with it the collateral movements that would have supported it. One balance to mark, one set of movements, less cash tied up.
Buy $100 million par from Barclays at 102-00, sell the same to JPM at 102-08. Eight 32nds, or $250,000. Both methods book two more trades to close it out. The difference is the price they go on at, and that decides how much cash has to move.
The closing trades execute at the current market, say 102-12. Against Barclays that is a gain of twelve 32nds, $375,000 in. Against JPM it is a loss of four 32nds, $125,000 out. Half a million of cash moves in both directions to settle $250,000, through two wire instructions and two genuine market trades booked at prices that generate no P&L of their own.
An assignment is a legal agreement that lets the buyer step out of EPN processing and settle on a single wire. On the sell to JPM, and on all trade terms, you instruct JPM to cancel their buy at 102-08 and book a sell TBA to Barclays at the same price, and Barclays to add the buy on the assignment plus a buy TBA with JPM. Barclays then pairs off, the full $250,000 arrives as one wire, nothing goes the other way, and JPM turns EPN pool allocations to Barclays.
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.
On a round robin the cash that has to move is always larger than the gain or loss on the original TBA trades. More money in motion for the same result is a riskier proposition, and it is the desk that carries that risk.
One wire instruction instead of two, and no new market trades in the account. These never show up in performance attribution, but wire fees and transaction costs are charged to the underlying account. Assignments cost the end investor less.
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.
None of this means round robins go away. Sometimes they are the right answer, and sometimes they are the only one available. So we automated those as well.
TBA Mortgage Master connects directly to Tradeweb, executes the round robin, and books the executed trades straight back into the system to carry on through settlement. No trader is involved at any point. The work comes off the trading desk entirely, offsets run right up to the cut-off rather than against somebody's capacity, and nothing gets left behind because the day ran out.
We will walk through a month of your TBA offsets and where the exposure, collateral and transactions are going.
