MDX.GN Data Resources
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Testing and Refining MDX Swap Pricing Methods
Projected MDX swap pricing has begun. Below we discuss various approaches that are being tested. A wealth of data on MDX is now available from ICE Data Services (formerly Black Knight). New access instructions are provided below.
MDX swap pricing is simple. MDX index swaps are patterned on plain vanilla swaps consisting solely of fixed coupon payments (+/- upfront payment) and floating Credit Event write-down amounts. Hence, swap cash flows are the sum of the coupon payments (+/- upfront) less the write down amounts. Since the MDX coupon and Credit Event recovery (severity) are fixed, the pricing variables are therefore limited to: (1) the expected credit event rate for the term of the swap, and (2) a risk premium. Altogether, the MDX swap price is the expected present value of the net fixed and floating payments.
Expected Credit Event rates over the remaining term of the swap can be projected using historical Ginnie Mae performance data and current mortgage/consumer related credit data. Ginnie Mae data is packaged for use in MDX.GN indices and available from both Vista and ICE Data (formerly Black Knight). Discussions with banks and investors have suggested that creating Credit Event curves for MDX.GN swaps is a simple adaptation of existing credit curves that are commonly used in the market. Standard MDX credit curves are expected to emerge for general market use soon.
Risk premium spreads are also widely available for benchmarking market consensus of mortgage borrower risk. Banks and investors are considering using CDX, CRT, mortgage loan pool, and other credit pricing as reference points for estimating risk premium for MDX.GN swaps.
Importantly, MDX indices and swaps are designed to eliminate the requirement for complex modeling, enabling their use by all market participants. Over the next few months, additional information about MDX swap price discovery and estimated hedge ratios between MDX and structured mortgage securities will be presented.
April Index Performance
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