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An assignment of trade is a term that is used to describe a situation in which one of the parties involved in a forward trade decides to assign that trade to a party that was not part of the original deal. The use of this particular approach is more common with deals that involve mortgage-backed securities that are part of a deal in a to be announced (TBA) market, and is usually employed when there is a desire to avoid either the delivery of the securities involved or to get around making a delivery of those securities. This type of strategy can also be employed as a means of eventually trading all the relevant assets involved with a loan to that outside party, who in turn makes a covenant to orchestrate a delivery into the original to be announced trade.
The underlying purpose of an assignment of trade is usually to control how and when trading activity on the assets associated on a loan will be delivered in a TBA market. This is sometimes necessary to ensure that the maximum amount of return is generated from the deal, while also preventing the rise of any additional risk to the parties involved in the original deal. By involving a third party in the arrangement, it is easier to manipulate the delivery of one or more of the securities backing the mortgage loan, both in terms of either receiving or issuing that delivery. Under the best of circumstances, the strategy helps to forgo a loss that would have occurred otherwise while still providing the latest party in the arrangement to receive some sort of benefit from the deal.
The strategy of an assignment of trade goes beyond simply selling one of the underlying securities to a third party. Typically, the deal will include a covenant by current holders to sell entire loans to that third party, who in turn is also agreeing to purchase those whole loans. An originator of a mortgage loan can use this process to effectively reduce risk associated with holding the loan, while the buyer has the chance to use the transaction to generate a steady stream of income from the ownership of those mortgage-backed securities associated with the acquired loans.
Like any type of investment strategy, an assignment of trade does carry some degree of risk. Default on the mortgage loans associated with the securities can mean losses to whomever currently holds those assets. This means that if the assignment of trade is complete when the default on the mortgages involved occurs, it is the third party who ultimately bears the loss. At the same time, if those mortgage-backed securities are associated with loans that have floating or variable rates of interest, there is also the opportunity for that investor to enjoy a greater return than originally projected.