17) Compounding this cheapest-to-deliver effect, the fact that the TBA seller effectively receives a valuable option well before settlement date to choose at settlement which bonds will be delivered, after additional information about the value of each security has been realized, further reduces the equilibrium price of the TBA contract relative to the value of an average MBS deliverable into that contract.
TBA trading effectively applies a common cheapest-to-deliver price level to an intrinsically diverse set of securities and underlying mortgages.
Because of the incentives associated with cheapest-to-deliver pricing, not all eligible MBS pools actually trade on a TBA basis.
According to conversations with market participants, a significant volume of physical delivery of securities occurs through the TBA market because, for many securities, the liquidity value of TBA trading generally exceeds any adverse-selection discount implied by cheapest-to-deliver pricing.
com), the leading provider of cross-asset analytics for derivatives valuations and risk management, today announced new functionality for Cheapest-To-Deliver (CTD) curve construction and the analysis of collateral.
The solution supports various currencies and collateral types, and covers the construction of OIS Curves, IR swap curves, Basis curves, XCCY basis curves and Cheapest-To-Deliver Curve - a blended collateral discounting curve that is optimized through the trade lifecycle among the various currency collateral curves.
With respect to other risks such as cheapest-to-deliver
risk, Senior Director Bill May said, "Based on Fitch's research for which LSTA provided important data and feedback, there appears to be little evidence of systemic cheapest-to-deliver
risk inherent in LCDS, as evidenced by the convergence in pricing of term loans and revolvers post-bankruptcy.
Key concepts such as cheapest-to-deliver
bonds, implied repo rates and conversion factors are discussed in detail.
For credit swaps including restructuring using the new supplement, the new provision would, in certain circumstances, limit the maturity of the obligations that are deliverable after the occurrence of a restructuring credit event, thereby limiting the so-called cheapest-to-deliver
option that has caused problems following recent restructuring events.