Could you give some brief background on the U.S. residential mortgage loan industry?

Broadly speaking, the residential mortgage loan industry in the U.S. has two main segments - Origination and Securitized product investment. Origination resulted in an average of over $300B in U.S. government agency securitized monthly issuance in 2021. The market for Agency Mortgage-Backed Securities is among the largest fixed-income markets in the world with over $9 trillion outstanding. Trading in securitized residential mortgages comprise about a third of the U.S. fixed income market and are second only to U.S. Treasuries.

ICE plans to launch its first mortgage futures contracts mid-year, subject to regulatory review. What market or client need do these contracts fulfill?

With major economies grappling with inflation and a resulting shift in interest rate cycles, these mortgage futures, which are based on primary mortgage market rates, can help originators, mortgage servicers, asset managers and real estate investors better manage and hedge their exposure to U.S. residential mortgage rates. For example, they will provide a more precise hedge for Jumbo originators that currently use conforming market rate products. For mortgage servicers, the futures are linked directly to the daily change in mortgage loan interest rates and will not have the inherent basis risk of the more volatile U.S. Treasury curve products currently employed. Equally, asset managers, that favour hedging with money market interest rate products, will have a more refined risk management tool for their institutional fixed income and retirement portfolio’s that are heavily weighted in agency mortgage-backed securities.

What are the key characteristics of these contracts?

The two futures contracts will be cash-settled based on the ICE U.S. Conforming 30-year Fixed Mortgage Rate Lock Index and the ICE U.S. Jumbo 30-year Fixed Mortgage Rate Lock Index. These indices are part of a suite that are based on a daily data pool of tens of thousands of anonymized locked rate applications. These applications are processed by ICE Mortgage Technology, which processes nearly half of all residential mortgages in the U.S. The indices are published daily and track U.S. residential mortgage loan applications where borrowers and lenders have committed to lock-in the interest rate prior to closing. There will be 6 serial monthly contracts available for trading in both variants. Unlike other negatively convex products used for mortgage loan hedging, they will have a fixed dv01- or dollar value of a basis point - providing for linear P&L movement. The contracts will trade on ICE Futures U.S. and clear through ICE Clear U.S.