2025 BMA Swap Explained: Municipal Interest Rate Swap Pricing & Insights

What Is a Bond Market Association (BMA) Swap?

A BMA Swap is a financial contract where two parties exchange interest rate payments on debt, with the floating rate linked to the U.S. SIFMA Municipal Swap Index. One party swaps a fixed interest rate for a floating rate, while the other does the opposite. This type of swap is often called a municipal interest rate swap.

Background of the Bond Market Association (BMA)

The Bond Market Association was a trade group of brokers, dealers, underwriters, and banks specializing in debt securities. In 2006, it merged with the Securities Industry Association to form the Securities Industry and Financial Markets Association (SIFMA), which now oversees the municipal swap index.

BMA Swap vs. SIFMA Index

SIFMA represents securities firms, banks, and asset managers in the U.S. It created the Municipal Swap Index, formerly known as the BMA/PSA Municipal Swap Index, which tracks hundreds of tax-exempt variable-rate demand obligations (VRDOs). These VRDOs have floating interest rates, and the index is calculated weekly as an average of these rates, serving as the benchmark for municipal interest rate swaps.

When an issuer and a counterparty (such as a bank or dealer) enter a swap, they agree to exchange payments based on a notional principal amount, which is never exchanged but used to calculate cash flows. Typically, fixed interest payments are swapped for floating-rate payments.

The Role of the SIFMA Index in BMA Swaps

BMA swaps use the SIFMA Index for floating rate payments. Since interest from VRDOs is often tax-exempt, the SIFMA rate generally aligns to ensure after-tax returns are comparable to taxable obligations. This makes the SIFMA rate a critical benchmark for municipal interest rate swaps.

Key Considerations: SIFMA vs. LIBOR

While LIBOR has been the standard for short-term taxable rates, SIFMA is the primary benchmark for short-term tax-exempt rates. The SIFMA rate usually trades between 64% and 70% of the comparable LIBOR rate, reflecting tax advantages of municipal bonds. For example, if the three-month LIBOR is 2.29%, the SIFMA rate would be approximately 1.55% (67.5% of LIBOR).

Note that LIBOR publication has been phased out, with most USD LIBOR rates discontinued by mid-2023, increasing the importance of alternative benchmarks like SIFMA.

Practical Example of a BMA Swap

An issuer with fixed-rate municipal debt may enter a BMA swap to convert this synthetic fixed-rate debt into floating-rate exposure without refinancing. The issuer pays the counterparty the SIFMA floating rate, while receiving a fixed rate in return. Despite this swap, the issuer continues paying bondholders the original fixed interest.

If floating rates drop below the fixed rate, the issuer gains a surplus from the swap counterparty, effectively lowering interest costs. This strategy helps manage interest rate risk and optimize debt servicing expenses.

Benefits of BMA Swaps

Interest rate swaps like the BMA swap allow parties to capitalize on their comparative advantages in fixed or floating-rate debt. They provide flexibility for budgeting and forecasting and can be used either to speculate on municipal interest rate movements or hedge exposure to state and local government debt.

Discover engaging topics and analytical content in Options & Derivatives Trading as of 12-12-2020. The article titled " 2025 BMA Swap Explained: Municipal Interest Rate Swap Pricing & Insights " provides new insights and practical guidance in the Options & Derivatives Trading field. Each topic is meticulously analyzed to deliver actionable information to readers.

The topic " 2025 BMA Swap Explained: Municipal Interest Rate Swap Pricing & Insights " helps you make smarter decisions within the Options & Derivatives Trading category. All topics on our website are unique and offer valuable content for our audience.