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Insights into MDX Swap Pricing Through Historical Data Analysis
MDX swap pricing is driven by two key variables: expected Credit Event (CE) rates and risk premiums. Applying actual MDX Credit Event experience and risk premiums from other credit markets allows market participants to estimate MDX swap pricing. Risk models and other critical trading and capital analysis rely on historical measures of price – particularly during times of stress. Vista, working together with dealers and investors, will be introducing estimated historical MDX swap pricing to support these analytics. The fundamental building blocks for this work are provided below.
MDX Swap Pricing Benchmarks
Estimating CE Rates during 5-year MDX swap terms can be done in many ways. Most begin with a review of actual historical CE data.1 MDX.GN CE history begins in January 2015 and refers to loans originated in the prior 12 months starting with the 2014 vintage.2 MDX.GN CE history can be divided into three (3) distinct 5-year periods: Pre-COVID, including COVID, and post-COVID. The 5-year period beginning in 2015 is the only period that does not include COVID, with the 2014 vintage enjoying the lowest cumulative Credit Events (398 bps). The 2016–2020 periods include the effect of COVID on borrower performance with cumulative 5-year Credit Events rising above 1,100 bps. Below is a table showing the full 5-year cumulative Credit Events for the periods 2015–2019.
Post-COVID Credit Event Rates beginning in 2021 are trending much lower than periods that include COVID — but still higher than pre-COVID. Most noticeable is that post-COVID CE rates are much higher during the first 24 months of their 5-year period compared to the pre-COVID periods. Before COVID, CE rates usually reached their peak after 36 months before tailing off. Post-COVID CE rates meanwhile rise quickly right from the start and begin flattening out after 24 months. Below is a table showing both post-COVID CE rates and the most recent six (6) months CE rates to demonstrate the acceleration and then deceleration of CE rates during and after the initial 24 months.
Credit Events drive losses in the floating leg of MDX swaps. Estimating CE rates is a core component of pricing MDX swaps. Actual CE rates as shown above provide a consistent input to historical pricing analysis and can also be used as an input for current pricing. Forward projections of CE rates under various market conditions can be estimated by applying historically comparable ranges of potential CE rates to generate cash flows for MDX swap pricing. Below is a chart that shows the actual MDX.GN CE curves for each index vintage.
Historical Risk Premiums are readily observable in other credit markets. The most frequently used benchmarks are CDX IG and HY. Using these benchmarks allows market participants to estimate general risk premiums for pricing MDX swaps.
Historical MDX Swap Pricing combines the building blocks of actual MDX.GN CE rates and comparable risk premiums. Vista MDX.GN index data is available to measure actual CE rates over the past 10 years. This data can be used to project the amount of the MDX swap spread needed to account for the floating rate payments of the swap. Credit-related benchmark pricing provides reliable market data for modeling risk premiums. Vista has created a flexible MDX swap pricing model that is based on this approach to estimate historical MDX swap pricing. Preliminary results are below and are for illustrative purposes only. Further details regarding the model will appear in upcoming newsletters.
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