Bond Market Association (BMA) Swap
What Is a Bond Market Association (BMA) Swap?
A Bond Market Association (BMA) swap is a type of swap arrangement where two gatherings consent to exchange interest rates on debt obligations, where the floating rate depends on the U.S. SIFMA Municipal Swap Index. One of the gatherings included will swap a fixed interest rate for a floating rate, while the other party will swap a floating rate for a fixed rate. The BMA Swap is likewise alluded to as the municipal interest rate swap.
Understanding the Bond Market Association (BMA) Swap
The Bond Market Association (BMA) is a defunct trade association that comprised of brokers, dealers, underwriters, and banks that managed debt securities. In 2006, the BMA merged with the Securities Industry Association to form the Securities Industry and Financial Markets Association (SIFMA).
BMA versus SIFMA
SIFMA is a securities trading group in the U.S. that addresses the shared interests of securities firms, banks, and asset management companies. The association made The Securities Industry and Financial Markets Association Municipal Swap Index (formerly called The Bond Market Association/PSA Municipal Swap Index), which is a high-grade market index included many tax-exempt variable-rate demand obligations (VRDOs).
VRDOs are municipal bonds with floating interest rates. The index is calculated consistently as the non-weighted average of the week by week rates of different VRDO issues remembered for the index. The U.S. SIFMA Municipal Swap Index fills in as a benchmark floating rate in municipal swap transactions.
When a interest rate swap is placed into by an issuer and a counterparty, for example, a dealer, bank, insurance company, or other financial institution, the two players consent to exchange payment streams as indicated by a notional principal amount which is never exchanged however simply used to work out the cash flow payments. In an interest rate swap, two counterparties "swap" fixed interest rate payments for floating-rate payments.
A Bond Market Association (BMA) swap is a municipal interest rate swap that has its floating rate payments in light of the SIFMA Index. Since the interest received from VRDOs meets all requirements for certain exemptions from income tax, the SIFMA rate will in general trend toward a rate that makes the after-tax position of a VRDO holder generally equivalent to the after-tax position of a holder of non-tax-exempt obligations.
Similarly as the London InterBank Offered Rate (LIBOR) is the most common measure of short-term taxable rates, SIFMA is the most common measure of short-term tax-exempt rates. The SIFMA rate generally trades as a negligible part of LIBOR, mirroring the income tax benefits associated with municipal bonds.
The SIFMA Index is generally 64%-70% of its taxable equivalent three-month LIBOR. For instance, expect the three-month LIBOR is 2.29%, and the SIFMA rate is roughly 67.5% of the three-month LIBOR, the SIFMA rate can be calculated to be 0.675 * 2.29% = 1.55%.
The Intercontinental Exchange, the authority responsible for LIBOR, will stop distributing one-week and two-month USD LIBOR after Dec. 31, 2021. Any remaining LIBOR will be discontinued after June 30, 2023.
Illustration of a BMA Swap
In a municipal interest rate swap, the issuer goes into a swap agreement to change over existing fixed-rate debt artificially into floating-rate debt, or vice versa. An issuer that has fixed-rate debt however expects winning interest rates in the market to diminish and doesn't have any desire to refinance or refund its existing debt issue, may decide to add variable exposure by going into a BMA swap.
In this case, the issuer will pay the counterparty the current SIFMA rate, and the counterparty pays the issuer a settled upon fixed interest rate. In any case, the issuer will keep paying its bondholders the normal fixed interest associated with the existing bond issue.
In the event that the floating rate is not exactly the fixed-rate, the issuer gets a surplus from the counterparty which can be utilized to make its interest payments. In effect, the variable rate exposure which the issuer currently has decreases its overall interest costs or debt service payments.
The benefits of two gatherings going into an interest rate swap arrangement can be huge. Frequently, every one of the two firms included has a comparative advantage in its fixed or variable interest rate obligation. Thus, for budgeting or forecasting reasons, a company might wish to go into a loan with a fixed or variable interest rate in which it doesn't enjoy a comparative benefit.
The BMA swap can be utilized to one or the other bet on the course of interest rates in the municipal market or hedge exposure to U.S. state and neighborhood government debt.