A BMA swap (or municipal interest rate swap) is an interest rate swap where one of the legs is a floating rate set by reference to the municipal BMA swap index (also called the US SIFMA Municipal Swap Index). This floating rate is exchanged for a fixed rate or for a floating rate based on another index.
Advantages of a BMA Swap
BMA swaps are increasingly popular from a hedging perspective for both municipal treasurers and asset managers, for the following reasons:
They cover exposure to the municipal market.
Since the BMA index is a tax-exempt index, there is no tax risk for the fixed-rate payer in a BMA swap, unlike swaps based on the LIBOR. Taxable indexes like LIBOR include a tax component that can be changed with changes to tax legislation. When linking to such an index an investor is subject to a tax risk which is not present when linking to the tax-exempt municipal BMA swap index.
Pricing a BMA Swap in SDX Interest Rates
Pricing a BMA swap is identical to pricing a vanilla swap with the following exceptions:
One of the legs must be a floating leg based on the BMA index.
The other leg must be based on a fixed rate or a floating rate based on another index.
Only the USD currency is supported.
By default the fixing frequency is set to a weekly basis.