The proposed CBOT® Mortgage futures contracts are based on conventional 30-year mortgage-backed securities issued by Fannie Mae and Freddie Mac. They are designed to focus on mortgage coupon levels at which new issuance is heaviest and trading activity is busiest. The new contracts will increase liquidity in the mortgage securities market by giving mortgage originators, servicers, dealers, and investors new and more effective risk-management tools.
CBOT® Chairman Nickolas J. Neubauer said, "The time for futures and options trading in mortgage-backed securities (MBS) has arrived. The total outstanding supply of MBS is projected to grow larger than that of Treasury securities in two to three years. With the unmatched expertise of our members, the integrity of our markets, and the synergies that already exist between the Treasury and agency markets, the CBOT® is the ideal trading venue for these products."
CBOT® Mortgage futures are designed to avoid the disadvantages of current risk management tools and to meet the risk management needs of a variety of participants in the MBS market. Because they closely track MBS trading volume through a focus on active coupons and recent production, CBOT® Mortgage futures correlate closely with overall mortgage market activity while providing the advantages of exchange-traded futures.
The corresponding options contracts enhance the utility of CBOT® Mortgage futures by providing unparalleled means to manage convexity and fallout risk. While over-the-counter mortgage options are available, they are highly illiquid. Because of this, the CBOT®’s new options will provide a more useful and flexible tool to mortgage originators, mortgage servicers, and mortgage derivatives users.
