CME Group’s Agha Mirza Talks Mortgage Rate Futures, Trading on an Exchange, Cross-Margining | November 2024 Data

Host: 00:00:30

Welcome to Market Advantage, the monthly podcast from Optimal Blue. Tune in for valuable insights from the Market Advantage Mortgage Data Report and in depth conversations with industry experts.

Stay competitive and optimize your advantage in the ever evolving mortgage landscape.

Olivia: 00:00:49

Hello to our listeners and welcome to this month's Market Advantage podcast by Optimal Blue. As always, I have Brennan O'Connell joining me here today.

We'll spend a few minutes talking about rate lock activity from November and then we will welcome this month's guest, Aga Mirza from CME Group to talk about a new partnership between the CME Group and Optimal Blue to launch a futures contract. So Brennan, good to see you there. Happy belated Thanksgiving.

We have the holidays right around the corner and tell me, what do we have to be thankful for on the origination front with November now in the books?

Brennan: 00:01:22

Yeah, happy Happy Thanksgiving, Olivia. November. Let's see. I'll start with the bad news. So rate lock volumes are down 25% in November. Rates hit their highest level since early July.

% from November of: 2023

Purchase volumes were up a more modest 5% while cash out and rate term refi volume. So a material 35 and 95% increase year over year respectively. Purchase lot counts a preferred metric.

I've mentioned this in previous episodes, our preferred metric for measuring market health, we're down slightly, just 3% year over year. It broke a two month trend of positive momentum.

That said, when controlling for the number of business days In November of 24 versus 23, I think we were at 23 in 23 and 22 in 24. So if you have control for that, the trend actually continued from September. So we were up again. I think it was just about 2% year over year.

So still some good reason for optimism that that underlying origination volume in the purchase market is continuing to see positive trends year over year.

Olivia: 00:02:45

Got it. So tell me about the rate environment. Any good news to share there?

Brennan: 00:02:51

Yeah, it wasn't all bad. There was some good news in the market heading into the Thanksgiving holiday. Rates were higher for most of the month.

The week leading up to Thanksgiving though provided a welcomed rally.

The OBMMI 30 year conforming fixed Rate Index, the benchmark which we'll be talking about with aga, it's going to be the underlying index used for the Chicago Mercantile Exchanges future contract to be Released in January, that benchmark finished the month down 11bps from October. Our 30 year FHA and VA rates fell as well, closing the month down 7 and 20 basis points respectively.

ook toward the final month of: 2024

What I think is really interesting is how borrowers and lenders are adapting to this rate environment. So the more difficult rate environment and associated affordability challenges have led to another strong month for FHA production.

en last November, actually in: 2023

VA share fell in November, but is up year over year and sits just above 11% of total volume. So government production in total, which I think as you see affordability challenges creep in. Tougher rate environment, you can see more of this.

Gubby lending now accounts for nearly one third of all volume.

Olivia: 00:04:32

Very interesting. So what about conventional lending? What's the story there?

Brennan: 00:04:36

Yeah, like much of our metrics from November, it's a bit gray, a little bit of good, a little bit of bad. For Star wars listeners out there, I'd say only Seth deals and absolutes.

seen in spring and summer of: 2020

So this trend that really conforming share peaking during the pandemic and then in the current rate environment and affordability challenges just continuing to see a downward slope over time.

On the other hand, within the conventional space you see non conforming lending, which includes both non QM and Jumbo, did fall slightly in November, but it remains near its recent highs at just under 15%. That's nearly a 5 percentage point increase in market share over the same period last year. Just a few other odds and ends we noted.

Purchase credit scores were flat at 739, while average scores on refinance locks dropped slightly in November.

.: 2730

Olivia: 00:06:08

Thanks Brennan. Appreciate the recap of data from November.

th of: 2025

Sessions will be built for everybo across the mortgage ecosystem and we have a lot of special and interesting guests on top. Brennan, what guest are you most looking forward to?

Brennan: 00:06:38

Well, it's a long list and a growing list. Obviously we got Tony Hawk, but many of the sessions are going to include a lot of industry experts.

One that we've been talking to most recently is our friends over at Richie May, who are going to, I think, do a really interesting presentation on data visualization and how best to leverage data to build out KPIs in Domo, which they're sort of the exclusive implementer of in the industry.

Olivia: 00:07:05

Excellent. That'll be a great session. And if you have not heard us talk about the summit before, yes, you heard that right at the beginning.

Legendary skateboarder and entrepreneur Tony Hawk will be a keynote speaker. Personally, I'm really excited for Sarah Wheeler, Editor in chief of HousingWire.

I'm a big fan of journalism and everything the folks at HousingWire do, so hope to see you all there. All right, it's time to welcome our guest. We have Auga Mirza. He is Managing Director and global head of Rates and OTC products at the CME Group.

Auga, welcome to the Market Advantage podcast.

Agha Mirza: 00:07:40

Thank you, Olivia. I greatly appreciate this opportunity and thank you to Optimal Blue for this.

Brennan: 00:07:46

Yeah, aga, so great to have you on. Really timely discussion we're having today.

Optimal Blue and CME just announced a partnership between the two companies to launch a mortgage rate futures contract based on the optimal blue 30 year conforming index. So very excited today to talk about that contract which will be based again on the Optimal Blue Mortgage Market Index.

Folks should be familiar with it. It's out on Bloomberg, it's on our website, it's been out for several years, updated daily.

So we're going to be talking about that index and how it's going to be powering this futures contract launched by cme. And then we're going to talk all things cme.

So many of our mortgage lender listeners may not be familiar with cme, so I think really good opportunity for us today to hear directly from you AGA about the CME and how the CME is doing a lot more now in the mortgage market.

Olivia: 00:08:40

Yeah, why don't we take that opportunity to hear more about what CME Group does as well as your role there. Aga?

Agha Mirza: 00:08:46

Absolutely. Brennan and Olivia, that's a great place to start. So for your listeners, just briefly, CME is the world's leading futures and options exchange.

It provides deep large and liquid markets across a range of asset classes ranging from interest rate, fixed income, which is my area, equities, foreign exchange, crypto, commodities, agriculture and you know what's remarkable about CME futures and options products is that we are equally strong and leading in all of the asset classes. So now let's move to what I do. I am managing director and global head for rates and OTC products. So I am in charge of the interest rate business.

That includes products such as, and you may have heard about these treasury futures and options, SOFR futures and options, credit futures, swap futures called ERIs. And now we are very excited to get into the mortgage space that I guess we would be talking about and.

Brennan: 00:10:01

We'Re so glad you are aga.

Agha Mirza: 00:10:03

So perhaps I can share a bit more about how we think about our place in the mortgage market and what we can offer and how we can help your mortgage lenders and other industry participants with regards to mortgage related products. Just a bit about the journey that we have been on in the recent decade or last 10, 12 years.

he first one to be created in: 1977

But let bring us to some more recent history and fairly quickly I think coming out of global financial crisis everyone or most of us in financial markets learned about the at the time upcoming Dodd Frank Act, Dodd Frank act and another piece of significant banking regulation called Basel 3.

They were both expected to get into our industry from a regulatory point of view and impact market structure, impact cost of trading and the type of products that make sense.

And so if I stand back in: 2013

Seeing what is coming in, which is all of our jobs in our respective industry, in our respective professions we sought, we engaged with clients and sought to solve their problems and deliver on their needs as much as possible. What that meant was that the treasury futures and VR so called exchange listed products, standardized listed products.

ed in the context of being in: 2012

Looking ahead to the next 10 years, we went on a journey to proactively and consciously working with market participants, innovate our products, our services and our tools. And essentially with the objective of providing balance sheet margin and capital efficiencies.

That multi year journey has worked out well and if I'm being honest, way better than my expectations today.

ed or more than tripled since: 201220

Treasury futures back in: 2013

In other words, treasury futures at CME alone trade 13% more than cash treasury securities that are trading across dealer to dealer and dealer to client platforms.

And by the way, when we talk today, when we talk talk about the treasury market, it is a $28 trillion market and in relation to the day to day secondary trading of that we trade 13% more in futures form. So now I'll come to mortgages, now that the market is in a good place and many more participants, especially asset managers, buy side clients.

Our using treasury futures as one of their leading products, if not their primary fixed income product. Clearly they all are very accustomed to trading futures at cme.

They are very much enjoying the benefits of standardized treasury futures and so for futures and so on and the fact that these products trade in our global equal access markets. But at the same time there is Now a record $1.4 trillion tied to interest rate derivatives in margin.

So the participants continue to look for margin and capital efficiencies and that, you know, the margin that is tied to interest rate derivatives, a lot of that is in unfair space and a lot of that has to do with the regulation that is already in place and the fact that over years thankfully the US and the economy continues to grow and the fixed income markets have grown, which leads to more derivatives and therefore more margins.

But the hunt for margin and capital efficiency is still there, which means that the time is right for futurizing the $300 billion a day mortgage market. So the $300 billion a day mortgage Market is second largest over the counter market behind the U.S. treasury market.

So clearly a very, very important market.

And in terms of working with Optimal Blue, which we are very excited about, we will be launching a specific product that we are naming Mortgage Rate Futures Contract. But the long form of that name would be a monthly futures contract that cash settles to optimal blue 30 year mortgage rate Lock Index.

And this index accounts for 35% of all mortgage rate locks that take place in the United States. So clearly highly representative and deleting index in the market. And then final point I'll make is that two years ago we launched TBA Futures.

TBAs or rather TBA forwards are the primary mechanism for trading mortgage backed securities in the OTC space.

We have launched futures versions of that that primarily provides access to mortgage originators and the holders of servicing rights, middle market clients.

But you know, in addition to everything that we just talked about, the fact that many participants are using treasury futures in significant ways and that makes the world very accustomed to trading futures.

In addition to all of that, through the TBA futures and through our overall fixed income distribution, we have a growing network of mortgage originators and service right holders.

And finally, you know, while TBA futures and OTC TBA Forwards are the mechanism that is being used today, a number of participants, including mortgage lenders have exhibited demand for the primary mortgage rate exposure. Both MBS and the mortgage rate include prepayment risk.

However, this contract tied to Optimal Blue Mortgage Rate Lock Index will be the first one that has primary rate exposure or primary rate exposure with prepayment. The other instruments essentially have an element of secondary market, you know, their own specific supply and demand and things like that.

Brennan: 00:18:34

Aga, that incredibly helpful context I think for all of our listeners to understand the journey that the CME took into this space. You know, certainly happy that you did it that I think there's so many efficiencies for many of our clients that they're going to be able to pick up.

Based on the new products that you're launching. I think about the portfolio of products that CME now offers.

Between the TBA futures, the recently announced optimal blue primary rate futures that are going to be launching in January, you now have this opportunity to manage all components of that mortgage asset both in the pipeline and then as well after the loans have been originated, funded, and then you're holding them in a portfolio that's a servicing, right? Or the actual mortgage asset itself.

You mentioned it, the exposure to prepayment risk, this primary rate input here that's going to be driving these features contracts or is the underlying benchmark for the futures contract that's going to be taking into account the margin component or the primary secondary spread that's built in by the originators.

And so what a great way for the CME to continue to help with folks on the risk management side as they're going to be looking to manage the risk from prepayment in addition to all of the capital market risks that CME has already launched the products to take care of.

So really an exciting development and I think really powerful to see the CME you talked about 175 year old entity coming into this space and for many of our lenders they're used to trading in maybe a different way. And so now you've got this large, well established exchange coming into the mortgage space.

What's going to be different for mortgage lenders today who are used to trading maybe just traditional TBAs. What's different for those folks who are going to start to think about leveraging some of the products that CME offers?

Agha Mirza: 00:20:40

Absolutely.

It's important to discuss the differences as well as what I hope are significant, significant benefits of trading at CME using the mortgage rate futures contract. So you know, I may say this more than once in the conversation because obviously I'm talking about CME centralized markets and cleared products.

But at a high level, who are we? We are in exchange.

That means that we run an anonymous all to all electronic centralized marketplace where those who have onboarded can trade seamlessly and efficiently.

And as soon as the trade is done it's a derivative transaction futures or options or swaps with the party that traded in our centralized markets futures or options faces CME Clearing which guarantees all the trades and risks manages them. When it comes to the OTC TBA market, which is where likely your mortgage lenders and other listeners to this podcast are going.

In the OTC market, clients needs to establish relationships with dealers and enter into the so called master securities forward transaction agreement. The dealers themselves typically are members of FICC's MBSD division.

MBSD Division is the mortgage clearinghouse within DTCC and ficc, which is essentially the industry utility for cleared fixed income securities. So dealers in their dealer to dealer market hedge through clearing at mbsd.

But the clients who have signed this master securities agreement, they remain bilateral with dealers. Now you'll see that that is significantly different from what I just described.

The moment you trade the mortgage rate future or the TBA future or treasury future, you automatically face the single CME Clearing Inc. Which is basically which has the highest ratings and which provides seamless, highly efficient electronic workflows.

The key difference in is that you don't need to negotiate paperwork after you have been onboarded by clearing member or broker who you would trade with that primarily involves account information and some other details.

And after that it's just a seamless electronic process and each trade is with the single counterparty which then opens doors for additional efficiencies.

Brennan: 00:23:40

That's very helpful and I think continuing on that efficiency discussion, there's another area that we've talked a lot about as we've developed this partnership and it's the concept of cross margining. So the advantage of having different products on the same exchange. A lot of our lender clients maybe are already trading treasury futures.

Maybe They've got OTC TBAs which are part of their risk management structure.

But what is it that this cross margining which is kind of a specific topic but I do think it's an important one to cover here, what is it about that or how does cross margining work and how is that going to improve really the cash utilization of our lender clients?

Agha Mirza: 00:24:24

Yeah, and I think it's a great point to briefly discuss the concept of margin itself. Throughout our prior discussion we have mentioned the word margin and I'm sure that most of your listeners are familiar with the concept.

But essentially margin is the amount of money that you have to put up to be able to trade a futures contract.

What is great about let's say mortgage rate futures or TBA futures versus a comparable exposure through a mortgage based backed security is that you don't need the full amount.

If you have exposure, let's say of $10,000 or $100,000 that you are looking to hedge, then there will be a number, be it 7% or 12% or 17%, some number of some percentage of the amount of exposure that you were about to hedge or risk manage on the exchange traded product that you will deposit with your clearing member. And that's called margin. Now most people like to hedge.

It's completely makes economic sense and like to take the exposure they need to take but also keep their cash and capital in hand for various reasons and for multiple uses. So cross margining is the ability for CME clearing to look at a participant's or a client's offsetting positions.

So for example, if a participant is a short mortgage rate futures and long treasury futures, our clearinghouse has the world's leading risk management team analytics.

So we, and we have regulator approved models and through constant work with regulators in our clearing members, we specify the percentages of offsets. And that's based on the fact that mortgage rates and treasury rates are correlated.

So based on those correlations between different asset classes at any given point in time, if we provide cross margining, there are typically specified offset percentages that we use and, and that enable for us to charge less margin.

So if you have, you know, a long position in one contract and a short in another that are offsetting in correlated instruments, then you don't have to put the sum of individual margin requirements. In fact, in some cases you would be putting less than the margin requirement of a single position. And that's the concept of offset.

I'll say one more thing.

Some of your mortgage lenders may not expect to have offsetting positions often, but they actually are very good beneficiary of cross margining as well. And how is that?

That is because the larger institutional clients, the banks, they have very large exposure, fairly involved, complex portfolios, they certainly are optimizing their margin and often, you know, in many cases they trade our products because of efficiencies such as cross margining.

So if cross margining becomes an attractive feature, a value proposition for bringing a large bank or an institution, large institutional client into the market, then that injects liquidity. Naturally that means that there are more need to buy and sell natural buyers and sellers and that leads to people showing standing bids and offers.

So the bid offer spread is referred to as liquidity, which essentially is the ability to readily buy or sell exposure with little slippage. So if you, if you have offsetting positions, you could benefit from cross margining directly.

But if you don't, then cross margining is still is helping to bring more participants, big participants and additional liquidity.

Brennan: 00:28:55

That's really helpful. The benefits you listed them, it's really myriad. I think for different clients it's going to be different benefits. Right.

So you talked about depositories who might have a portfolio that they are managing, which includes not just mortgage assets but other types of fixed income instruments. And there's the obvious benefits there.

They are very likely already engage with the cme so it makes their risk management costs that much lower within their mortgage portfolio even for non lenders.

I think about folks that are managing maybe a pipeline as well as a servicing book and oftentimes these assets might behave in opposite directions and cross margining now with the ability to have your risk management infrastructure have an offset because you're working with a single counterparty at the CME is really powerful. So again this is we talk about it a lot here at optimalu where we're focused on profitability of our clients and ultimately get more folks in homes.

And in many ways this is going to lead to both.

So I know we're coming up on time here, but we do just have one more question aga that we want to make sure we put a pin in here because we we did hit on it a bit.

But pros of having a single counterparty like the CME versus Today many mortgage lenders are used to working with a variety of different broker dealers. Could you talk a little bit more about that experience and what our mortgage lenders who aren't working with the CME today might come to expect?

Agha Mirza: 00:30:33

Yes, that's a very important point. To further make some comments on, as we said, you are not signing multiple agreements with multiple dealers, less paperwork.

You are not maintaining positions and exposures with multiple dealers.

Because obviously when one participant, for example a mortgage lender has a need to buy or sell, bank A may have a better price than bank B so they'll trade with bank A later when they have another need, then bank B may have a better price and they'll trade with bank B which then leads to open positions with multiple parties. What is unique with CME is that there is a single equal access global or to all market. So you know everybody is aggregated in there.

Which means that the same experience of trading with party A and party B will feel this will feel same. You'll just trade on the best price. And as I said earlier, you're not maintaining multiple relationships and keeping multiple open positions.

And also there's very little if any counterparty credit risk in facing CME Clearing House. You all know that counterparty credit risk in the OTC market is a key consideration that always needs to be paid attention to.

So obviously there is that that simplification that that CME Clearing Inc.

Is highly, highly rated and you go through the paperwork once and that is why when there is, let's say a bit of stress in the markets or potentially a credit crisis and I'm not wishing for one, but if there is some kind of stress then there is. As has been seen throughout our 175 year type history, there is no concern about trading against CME Clearing.

And that is why everybody comes to the single marketplace. So you also get better liquidity in times of stress.

So lack of counterparty credit risk, lack of papering and multiple relationships, better liquidity. Those are some of the benefits.

Olivia: 00:33:06

Perfect. Well, Aga, this has been so insightful.

I speak only for myself, but I have learned a lot in a short amount of time hearing you and Brennan discuss this. But to bring us home, I would like to ask you a bonus question that we ask of all of our guests.

So, as you may know, our mission statement at Optimal Blue is to help lenders maximize their profitability on every loan transaction so that they can in turn get more aspiring homebuyers into homes. So with that in mind, in your opinion, what is one thing an originator should be doing in today's market to maximize profitability?

Agha Mirza: 00:33:44

You know, we live in a evolving, changing world. Change is the only constant, as I'm assuming an ancient Greek philosopher said.

So I'll assume that your listeners are caught up on data analytics and technology and looking at AI and things like that. Why don't I suggest something from our vantage point, our expertise?

I would suggest that the originators, mortgage lenders, pay attention to and learn about the relationship between primary mortgage rates that the Optimal Blue index captures and the secondary market rate that market participants are used to market back security rates, TBAs, swaps and treasuries that they may be using or hedging with.

And what I mean by the relationship is that I personally would expect discussions or published content, be it from CME or Optimal Blue or industry strategists, some kind of discussion or hopefully more significant research highlighting the relationship between PR primary mortgage rates and secondary rates.

And if participants pay attention to that, then they can come up with their own framework and their own rules of thumb, or more specific analytic approaches to try and buy and sell instruments that are more advantageous for them.

In our trading industry, that's called the concept of relative value trading, or optimizing your risk management and hedging needs in relation to relative value trading. So I would urge them to keep an eye out for that discussion or published content.

Olivia: 00:35:42

Perfect. Thank you. You are certainly speaking our language here by connecting the primary market to the secondary market.

So really excellent answer and thank you so much again for all of your insights and for taking time to join us today. And thank you to all of our listeners for tuning in.

Brendan and I will be back in January with another episode of the Market Advantage podcast and more data insights. Take care.

Agha Mirza: 00:36:06

Thank you.