SIFMA Announces Changes to the SIFMA Municipal Swap Index - August 18, 2014
Answering Your Questions About The Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index (formerly The Bond Market Association/PSA Municipal Swap Index)
WHAT IS THE SIFMA MUNICIPAL SWAP INDEX?
The Securities Industry and Financial Markets Association Municipal Swap Index is a 7-day high-grade market index comprised of tax-exempt Variable Rate Demand Obligations (VRDOs) with certain characteristics. The Index is calculated and published by Bloomberg. The Index is overseen by SIFMA's Municipal Swap Index Committee.
WHY WAS THE INDEX CREATED?
The Index was created in response to industry participants' demand for a short-term index which accurately reflected activity in the VRDO market. In 1991, SIFMA established a Market Index Subcommittee to analyze the need for such an index, and and that Subcommittee developed the SIFMA Municipal Swap Index. In 2014 SIFMA amended the Index criteria such that reset rates that comprise the Index must have been reported to the Municipal Securities Rulemaking Board’s Short-Term Obligation Rate Transparency (SHORT) System.
HOW IS THE INDEX USED?
One of the most critical elements of a swap transaction is the Index on which the floating rate is based. (In a swap, two counterparties "swap" fixed rate interest payments for floating rate payments or vice versa). The Index serves as a benchmark floating rate in the swap transaction. Industry-wide acceptance of the Index naturally increases liquidity and thus the attractiveness of the transaction.
HOW WERE THE INDEX CRITERIA SELECTED?
Extensive historical correlation analysis was employed, incorporating and excluding a wide range of variables. After many revisions, the SIFMA Subcommittee selected specific criteria which would most effectively represent activity in the variable rate demand note market.
WHAT ARE THE CRITERIA FOR THE INDEX?
In order for an issue to qualify for inclusion in the index it must...
- be a weekly reset, effective on Wednesday (no lag resets considered);
- NOT be subject to Alternative Minimum Tax;
- have an outstanding amount of $10 million or more;
- have the highest short-term rating [VMIG1 by Moody's or A-1+ by S&P];
- pay interest on a monthly basis, calculated on an actual/actual basis; and
- the reset rate must have been reported to the MSRB's SHORT system by 3:15 p.m. eastern time on the day the Index is calculated.
In addition, only one quote per obligor per remarketing agent will be included in the Index. Issues from all states are eligible for inclusion.
HOW IS THE INDEX CALCULATED?
The Index is calculated on a weekly basis, and released to the public on Wednesday. The following are considered in the Index calculation:
- The standard deviation of the rates, screened for compliance with the criteria, is calculated. All issues falling outside +/-1.0 standard deviation is dropped.
- Each participating remarketing agent is limited to no greater than 15 percent of the number of securities in the Index by a random exclusion method.
- The Index value is the average of the reset rates after all screened and dropped rates are excluded.
WHAT IS THE SOURCE OF RATE INFORMATION USED TO CALCULATE THE INDEX?
As of August 20, 2014, in order for a VRDO reset rate to be used in the weekly Index calculation, the rate must have been reported to the MSRB's SHORT system by no later than 3:15 p.m. eastern time on the Wednesday that the Index is calculated. When Wednesday is the day before a holiday when SIFMA has recommended that the municipal securities market be closed, the Index is calculated based on reset rates reported to the MSRB's SHORT system by 11:30 a.m. eastern time. Under MSRB Rule G-34, each remarketing agent is required to report certain information about each VRDO on the day the VRDO rate is reset. This information includes, among others, the interest rate established for the VRDO. The Calculation Agent for the Index, Bloomberg, uses the reset rates reported to the SHORT system as the basis for the Index calculation.
For Index calculations before August 20, 2014, VRDO reset rates used in calculating the Index were derived from Municipal Market Data's (MMD's) Variable Rate Demand Note Network™. Using the Network, over 80 remarketing agents (representing more than 90 percent of the market) transmit daily rate change information for their issues to MMD's database.
WHEN IS THE INDEX CALCULATED AND PUBLISHED?
New Index values are published on Wednesdays at approximately 4:00 p.m. eastern. If Wednesday is a SIFMA-recommended market holiday, the Index is published on the next business day. If Wednesday is the day before a SIFMA-recommended market holiday, the Index is published at approximately 12:30 p.m.
HOW CAN I GET THE INDEX?
The Index is available here at no charge to interested parties, including complete historical information. The Index is also available through the Bloomberg.com Web site, through the Bloomberg Professional service, and through other authorized distributors.
HOW DO I KNOW THAT THE INDEX REPRESENTS "THE MARKET"?
The Index is comprised of actual issues from a source of data on VRDOs that is subject to regulatory oversight and enforcement, representing the entire universe of VRDO securities. By applying the criteria mentioned above, the Calculation Agent is able to calculate a truly representative Index.
HOW MANY VRDO ISSUES ARE IN THE INDEX?
The actual number of issues that make up the Index varies over time as issues are called, converted, mature or are newly issued. In addition, if changes occur which violate the criteria or calculation methods, an issue will be dropped. Typically, the Index has included hundreds of issues in any given week.
MY SWAP IS FOR 20 YEARS. HOW LONG WILL THE INDEX BE AROUND?
SIFMA initiated the Municipal Swap Index in 1992, and the Index has been calculated on a consistent, weekly basis since its inception. SIFMA intends to provide the Index for as long as data are available.
WHO IS THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION?
The Securities Industry and Financial Markets Association (SIFMA) brings together the shared interests of hundreds of securities firms, banks and asset managers. SIFMA's mission is to support a strong financial industry, investor opportunity, capital formation, job creation and economic growth, while building trust and confidence in the financial markets. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).