Answering Your Questions About The Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index (formerly The Bond Market Association/PSA Municipal Swap Index)
produced by Municipal Market Data (MMD)
WHAT IS THE SIFMA MUNICIPAL SWAP INDEX?
The Securities Industry and Financial Markets Association Municipal Swap Index, produced by Municipal Market Data, is a 7-day high-grade market index comprised of tax-exempt VRDOs from MMD's extensive database.
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 determine a solution. SIFMA contacted Municipal Market Data in this effort because of MMD's extensive database of active variable rate demand notes, and MMD's long-standing reputation within the industry. MMD worked closely with SIFMA to determine appropriate criteria on which to base the index.
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.
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 subscribers on Wednesday. The following are considered in the Index calculation:
- The standard deviation of the rates is calculated. Any issue falling outside of +/-1.0 standard deviations is dropped.
- Each participating remarketing agent is limited to less than 16% of the Index by a random exclusion method.
WHAT IS THE VARIABLE RATE DEMAND NOTE NETWORK™?
MMD's Variable Rate Demand Note Network™ is the most comprehensive source of information on VRDOs available. Using the Network, over 80 remarketing agents (representing more than 90% of the market) download daily rate change information for their issues to MMD's database. Interest rate and interest payment factor data is then retrieved electronically by portfolio managers, fund accountants, custodians, pay agents, and income collection departments. Data available includes current and historical rates, issue ratings, credit enhancements, and detailed interest accrual specifications.
HOW DO I KNOW THAT THE INDEX REPRESENTS "THE MARKET"?
The Index is comprised of actual issues from the most comprehensive source of data on VRDOs available. MMD's database contains extensive information for more than 15,000 active VRDOs. By applying the criteria mentioned above, MMD 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 will vary in 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 500 issues in any given week.
MY SWAP IS FOR 20 YEARS. HOW LONG WILL THE INDEX BE AROUND?
Municipal Market Data has built its reputation through a continuing commitment to the municipal bond industry. We firmly believe in the value of this information to industry participants, and intend to provide the Index for as long as data is 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).
WHO IS MUNICIPAL MARKET DATA?
Municipal Market Data, a Thomson Financial Services Company, was founded in 1981, dedicated to the development of strategic analytic tools for institutional investors in the municipal bond market. Since then the company has created a broad range of products to meet the diverse needs of the investment community. In addition to several daily on-line analytical products, and a futures consulting service, MMD offers the Variable Rate Demand Note Network™.
HOW CAN I GET THE INDEX?
The index is available on a subscription basis, from Municipal Market Data. For more information, call (617) 856-2900.