Wall Street Firm Touts Prepay Derivatives

The Goldman Sachs Group is starting a market for derivatives based on mortgage prepayment speeds.The first auction of options and futures on prepayment speeds is scheduled to take place June 12. Thereafter, Goldman Sachs hopes to conduct the auctions on the second and fourth Thursday of each month. Each month, all extant options will effectively reopen as existing contracts. Goldman Sachs executives say that creating a market for prepayment derivatives will provide a better hedge for mortgage prepayment risk. "The key for the success or failure of this product is can we get mortgage servicers to participate," said Allen Brazil, managing director for mortgage and ABS research at Goldman Sachs, told MortgageWire. Buyers for the forwards and options will likely be mortgage servicers. Sellers of the derivatives are likely to include Wall Street firms, hedge funds, and other mortgage investors, Goldman Sachs believes.