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ICE Mortgage Fixed Rate Lock Index Futures Seek to Solve A Problem As Old As Interest Rate Futures | John Lothian News

ICE Mortgage Fixed Rate Lock Index Futures Seek to Solve A Problem As Old As Interest Rate Futures

John Lothian

John Lothian

Executive Chairman and CEO

ICE Futures US to Launch Two Fixed Rate Lock Mortgage Futures Contracts on June 13

ICE is trying to solve a problem as old as interest rate futures, but is bringing to bear new resources and businesses it has acquired and grown over the last several years. That problem is how to hedge mortgage rates. 

John Lothian News talked to David Farrell, chief operating officer of ICE Futures US, about ICE Mortgage Rate Lock Index futures, which are to launch on June 13, 2022, subject to regulatory approval.

Trillions of dollars of risk are currently being managed using money markets and U.S. Treasury markets, Farrell said. This product is a superior product to hedge mortgage rate risk, Farrell said, noting the volatility and divergences we have seen in U.S. Treasury futures in the last couple of years.

The products are based on some indexes ICE announced last fall, including some based on different types of loans, including conforming loans and jumbo loans. There are indexes based on the purpose of the loan, like purchase, refinance or construction loan. There are indexes based on borrower loan indicators, including based on loan to value ratio.

All of the indexes and sub-indexes are based on averages of actual mortgage borrower application data where the borrower and the lender have agreed to lock in a rate.

Two futures contracts are launching in June. They will trade on ICE Futures US and clear on ICE Clear US, if the regulators give the go ahead. The first contract to launch is on conforming 30-year fixed rate mortgage contracts and the second is on jumbo fixed 30-year mortgage rates, Farrell said. The contracts are expressed in annual percentage rate, or APR, terms.

The interest rate curve will be monthly contracts listed six months into the future, starting out, Farrell said. As you would expect of contracts based on an index, the contracts will be cash settled. 

The underlying data that fuels the index comes from ICE Mortgage Technology, which processes nearly half of the U.S. mortgages in the U.S., Farrell said. There are tens of thousands of locked rate applications that feed the index data, he said.

These products give mortgage providers and investors a better correlated tool to hedge those other instruments, Farrell said.  Mortgage servicers or REITs might find these futures contracts more useful and a more precise hedge.

Farrell’s goal is to market this product to people with the risk that the contracts can better manage and make sure there are market makers and other participants to keep it liquid for them to participate efficiently. 

Farrell and ICE know the challenge in front of them and the opportunity to see a very large market for ICE if it works. 

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