Public Securities Association

The Public Securities Association (PSA) was a prominent American trade organization representing firms that underwrote, traded, and sold fixed-income securities. Think of it as the main club and lobbying powerhouse for the bond world, especially for dealers in U.S. Treasury securities, federal agency securities, and municipal bonds. Founded in 1912 and officially named the PSA in 1980, its primary mission was to promote a fair, efficient, and liquid bond market. The PSA was instrumental in developing industry standards, best practices, and ethical guidelines that helped shape the modern bond market. Though the name itself is now part of financial history, its influence lives on. In 2006, after a series of mergers, it became part of a new, larger organization: the Securities Industry and Financial Markets Association (SIFMA). So, if you encounter the term “Public Securities Association” in older texts, just think of it as the direct ancestor of today's SIFMA.

Imagine the bond market as a massive, sprawling city. The PSA acted as its city planning commission, traffic authority, and diplomatic corps all rolled into one. Its members were the “market makers”—the big banks and brokerage firms that ensure you can always buy or sell a bond. The PSA’s main jobs were:

• Setting Standards: It created standardized practices for bond trading, clearing, and settlement. This work was crucial for reducing errors and increasing the market's overall efficiency. Without these standards, trading bonds would be far more chaotic and risky.
• Advocacy and Lobbying: The PSA was the collective voice of the bond industry in Washington, D.C. It represented its members' interests before regulatory bodies like the SEC and government institutions like the U.S. Department of the Treasury.
• Data and Research: The association was a key source of data and analytics for the fixed-income markets, helping professionals and policymakers make informed decisions. Its most famous contribution in this area is a tool still widely used today.

Organizations, like companies, evolve. To better represent a financial world where the lines between different types of securities were blurring, the PSA underwent a transformation.

1. 1997: The Public Securities Association was renamed The Bond Market Association to reflect its broad focus on all aspects of fixed-income.
2. 2006: The Bond Market Association merged with the Securities Industry Association (which focused on equities) to form SIFMA. This landmark merger created a single, powerful trade group representing the entire financial industry, from stocks to bonds and beyond.

Today, SIFMA carries on the legacy of the PSA, advocating for effective and efficient capital markets on behalf of hundreds of member firms.

While the PSA itself is a thing of the past, its legacy directly impacts investors, especially those interested in bonds.

This is the PSA’s most enduring and practical gift to the investment world. If you've ever looked into mortgage-backed securities (MBS), you've likely encountered this term. The PSA developed a benchmark, now called the PSA Prepayment Model, to standardize the way investors measure the rate at which homeowners pay off their mortgages early. Homeowners might prepay by refinancing to a lower rate or by selling their home. This prepayment is a huge factor in the return an MBS investor receives.

• What it is: The model provides a monthly series of prepayment rates. A “100 PSA” speed is the benchmark. It assumes prepayment rates start low and increase steadily for the first 30 months of a mortgage pool's life, then level off.
• How it's used: An MBS might be described as having a speed of “150 PSA” (50% faster than the benchmark) or “75 PSA” (25% slower).
• Why it matters:
  1. Faster Prepayments (>100 PSA): Often happens when interest rates fall. Investors get their principal back sooner than expected but must reinvest it at lower rates. This is known as reinvestment risk.
  2. Slower Prepayments (<100 PSA): Often happens when interest rates rise. Investors are stuck with their lower-yielding investment for longer than anticipated while new bonds are being issued at higher rates. This is known as extension risk.

Understanding the PSA model is essential for anyone trying to analyze the risks and potential returns of investing in mortgage-backed securities. It's a prime example of how the PSA's work continues to bring clarity and analytical power to investors.