MDX.GN Data Resources
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Broad Market Applications for MDX.GN Swaps
MDX is for everyone. The use cases for trading MDX.GN swaps span a wide range of market needs across multiple asset classes. Vista has created a simple cashflow model for pricing and computing performance of MDX.GN swaps. Access to this tool and other resources are provided below.
MDX indices and MDX swaps have uses for anyone who has or seeks exposure to changes in household balance sheet health in the U.S. The largest debt exposure for households in America is their mortgage; hence, changes in mortgage borrower performance are highly correlated with general household and consumer health. So who are the natural MDX buyers and sellers and what are they doing?
Natural MDX swap buyers (short risk) include banks, investment managers, lenders and insurers. Banks seek to offset credit risk in their trading books, whole loan positions and financing commitments. Through hedging, they can reduce their net credit exposure while allowing them to increase their overall participation in the market. Investment managers buy MDX swaps to reduce market exposure quickly and efficiently without having to sell often illiquid or difficult to replace cash positions. Buying MDX swaps as a hedge is particularly important for specialized managers and hedge funds who seek to generate alpha through individual security selection rather than macro market movements. Lenders, servicers, and insurers, who hold some of the least liquid positions, also look to MDX swaps as a correlated liquid alternative for managing their exposure to significant market changes.
An MDX.GN swap cashflow model has been created to analyze trading spreads and return performance. The design and scenarios benefit from collaboration with Ed Golding at MIT and several dealers. Three different Credit Event rate curves calculate monthly cashflow values. Users can view return profiles over two terms: roll date (6 months) and maturity (5 years).
The MDX.GN swap cashflow model is now ready to be shared with and further tested by market participants. Please email info@vistacap.com with the subject “MDX.GN Swap Model” to request.
Natural MDX swap sellers (long risk) include investment managers, mutual funds, pension funds, insurers, ETFs, REITs and hedge funds. Acquiring portfolio exposure to mortgage credit by selling MDX swaps is an efficient way to obtain generic market risk and to allocate it uniformly across portfolios. As targeted cash positions become available, MDX swap positions can be unwound to achieve specific investment objectives. This dynamic allows managers to improve the liquidity profile of their mortgage credit strategies and execute mandates immediately.
Alternatively, MDX swaps can provide a simple beta overlay to an entire portfolio, raising exposure or leaving excess funds to be held in more liquid securities. For hedge funds, MDX swaps can generate attractive levered returns. And unlike tranched mortgage securities, MDX swaps do not have any internal leverage in their structure – so managers can easily adjust their leverage ratios through position sizing. MDX Swaps can stimulate growth in mortgage credit ETFs by providing both a standard tracking benchmark and a proxy for share creation to meet ETF inflows.
MDX swap liquidity and price transparency are expected to foster improvements in the overall mortgage credit market in the same ways that TBA trading advanced the agency MBS market and CDX trading augmented the corporate market. The simple design of MDX swaps provides a natural benchmark and liquidity source for other segments of the mortgage credit market. Additionally, MDX swaps allow traders and investors to link paired trades with major market sectors– creating additional liquidity for all. Specific examples of cross market/sector trades include CDX vs MDX, MBS vs MDX, specific corporate/equity vs MDX and, as the number of MDX Series expands, MDX/MDX. Trading across these related markets can expand price discovery and liquidity at both an individual and macro level for all market participants.
Benchmarking with MDX indices and swaps provides the market with market-driven benchmarks for measuring mortgage borrower performance. Issuers, insurers, fund managers, and ETF participants will be able to reliably track macro credit changes and investment performance. Regulators, economists, and analysts can use both the fundamental and pricing data from MDX indices and swaps to improve measurement of general household balance sheet health.
MDX.GN Swap Cashflow Model
Overview of MDX Swap Pricing
Explore a Conceptual Framework