Vista MDX Indices^TM

Benchmarks for Financial Products

MDX swaps are designed for hedging mortgage credit exposures. The underlying obligors within MDX indices represent a wide and diverse range of mortgage borrowers whose credit performance is highly correlated with other mortgage instruments. To adjust for credit and structural difference between MDX swaps and other mortgage products, hedge ratios are likely to be employed. Vista has compared the historical performance of MDX swaps to several different mortgage structures to understand relative price movements. These observations help demonstrate how hedge ratios may be used to match expected performance under differing market conditions. Access to this study and other resources are provided below. 

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Dynamic Hedging

Mortgage credit hedging takes many forms and is typically tailored to match specific mortgage exposures. Buying protection via CDX IG and HY swaps is the most common approach to hedging mortgage credit risk with short equity positions in housing or consumer-related stocks also playing a role. So why use MDX swaps and how correlated is their performance to other mortgage products?  

MDX swap performance is directly tied to mortgage borrower performance – rather than indirectly linked through corporate borrower performance as is the case with CDX. Hence, at a macro level, MDX swaps prices should correspond well to expected changes in overall mortgage borrower performance. Within this general context, the highest correlations are likely to be found when mortgage loans or securities have borrower characteristics that closely match those of the MDX indices. As borrower and collateral characteristics begin to vary from those in the MDX index, market participants may need to utilize hedge ratios to improve their expected correlations.  Adjusting for differences between the credit characteristics of MDX reference borrowers and the spectrum of residential borrowers can be achieved through direct comparisons at the loan or aggregated level. This is already a common practice today.  

Structured mortgage products and MDX Swaps can have very similar borrower credit profiles and yet have very different performance under changing market conditions. Attachment points triggered by changes in prepayment rates and loss allocations determine sequential write downs on structured mortgage products. Meanwhile, MDX swaps are unstructured and have a uniform allocation of Credit Event losses. As a result, when Credit Event expectations rise and fall, structured mortgage product pricing can move unevenly with MDX Swaps. This effect is most pronounced on subordinated tranches, which have the greatest sensitivity to changes in borrower performance

Historical Pricing for CRT M2s, B1s, and MDX Swaps demonstrate how relative price movements vary under different market conditions.  To create this study, Vista used a 5-day moving average of daily price changes of M2 and B1 Vista CRT Indices™ and MDX swaps. Vista CRT indices™ are based on daily prices of both CAS and STACR® securities aggregated by vintage and subordination – and weighted by amount outstanding (see www.vistaindex.com/crt-indices). Historical MDX swap pricing has been estimated by Vista based on a model developed in collaboration with dealers and mortgage industry experts. Vista CRT indices and MDX swap vintages are rolled in January of each year. The study covers the period from January 1, 2018, to December 29, 2023. Please click here to download the data used in this study.

Subordination Class appears as a key factor driving the differences in structured security performance compared to MDX swaps. The chart above suggests the range of price movement variability is roughly double for B1 tranches vs. M2 tranches under most market conditions. This suggests that lower attachment points generate consistently greater differences in price movements compared to higher attachment points. Furthermore, as overall spreads widen, comparative volatility increases as well. Volatility chart is below:

Aligning credit and structure with MDX Swaps through hedge ratios is important to achieving risk management objectives. As the market prepares for MDX swap trading and clearing, additional data and hedging techniques are expected to emerge. Actual MDX swap trading prices, when available, should further refine these approaches and demonstrate the effectiveness of using MDX swaps for hedging purposes.

MDX.GN Series 05 Characteristics

Prior MDX Newsletters

If you happened to miss our previous newsletters, no worries at all. You can find them conveniently attached right here for your review.

• May 15, 2024: Positioning MDX Swaps

• May 1, 2024: MDX is for Everyone

• April 16, 2024: Pricing MDX - Now Underway



MDX Data Access

Regular access to Vista MDX.GN data through ICE Data Services (formerly Black Knight) can be requested via Vista Index Services website site: www.vistaindex.com.

1. Select 'MDX Data' from the main page and then 'Historical Data & Programmatic Access'
2. Accept the Terms and Conditions and hit 'Next'
3. Fill out the form with your name, email address, organization name, etc. and hit 'Submit'
4. A separate email will be sent from ICE Data with access credentials and instructions

Note: Please allow up to 1 business day for ICE Data to respond to your data request.

May 2024 MDX.GN Index Data

Click Image Below to Download Data File

MDX Indices are mortgage credit benchmarks based on the performance of single-family home loans. By referencing a large cross-section of US household borrowers, MDX Indices capture essential trends in the credit performance of US housing and consumers. With clear, rules-based definitions for determining credit events and straightforward calculations for assigning values, MDX Indices are designed for broad use as benchmarks for financial products including swaps and derivatives. Vista will publish a new MDX Series every six months, enabling the market to monitor household debt trends across a range of characteristics.

Vista MDX Indices™ data is provided for your information purposes only, without regard to your specific investment objectives, financial situation or particular needs, and shall not be construed as a solicitation, offer or recommendation to buy or sell any securities, investment or other financial instruments, to effect any transactions or to conclude any legal act of any kind whatsoever. By opening and/or viewing any attached materials containing Vista MDX Index data, you agree to be legally bound by Vista Index’s Availability & Use of Data located at www.vistaindex.com/MDX Indices. If you do not agree to be bound by the Use of Data, do not open, read, copy, save or redistribute materials containing Vista MDX Index data.

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