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MDX Swaps are a new derivative product designed to provide a standardized way to transfer broad U.S. residential mortgage performance risk. One of the key innovations of MDX Swaps involves their rate-style credit swap structure, which offers fundamental efficiencies to counterparties looking to hedge or source exposure to household credit performance. Payments are based on the measurement of borrower credit events in the MDX.GN Index, which references loan-level performance on Ginnie Mae mortgages. Comparison with interest rate swaps and credit default swaps (“CDS”) highlights key elements of MDX Swaps and shows their rate-style mechanics.
Rate-Style vs Default-Style Credit Swaps
MDX Swaps mirror the structure of rate-style swaps, such as plain vanilla interest rate swaps, with monthly exchanges of fixed and floating payments. The MDX Index references borrower credit stress, but MDX Swaps are not conventional CDS. MDX Swap economics are driven by scheduled fixed coupon payments and formulaic floating payments based on the MDX Index. In contrast, CDS are structured like insurance policies with premium and contingent payments, the latter based on episodic issuer-specific default settlements.
Below are some of the key structural features that led the ISDA MDX working group to conclude that rate-style definitions – specifically, the 2021 ISDA Interest Rate Derivatives Definitions – support the structural features of MDX Swaps.
Payment Structure
MDX Swaps and rate-style swaps have regular fixed rate payments that are calculated based on the notional value of the swap until expiration. The notional amount of an MDX Swap declines monthly based on incremental changes in borrower credit stress. In contrast, when single-name CDS experiences a credit event, fixed payments are curtailed, and the swap term is closed out prior to expiration. Fixed payments on Index CDS, which are baskets of single-name credit default swaps, also partially terminate based on episodic credit events on any individual reference obligor contained in the index.
MDX Swaps and rate-style swaps have floating rate payments that are tied to indices. With MDX Swaps, the floating payment amount is derived from the MDX Index. The MDX Index reflects the monthly reported credit-event experience across the reference loan population. Credit events relating to the mortgage loans that compose the MDX Index are purely data-driven and assigned a fixed recovery of zero, removing any determination lag or subjectivity. The month-over-month change in the MDX Index determines the floating amount paid. Likewise, a typical interest rate swap may reference the Secured Overnight Financing Rate (“SOFR”) to determine the floating rate payments owed under the swap. The average SOFR performance for each period, as reported by the Federal Reserve Bank of New York, determines the floating rate payments on the swap.
By contrast, CDS contingent payments are driven by determination committee decisions and an auction process to determine recovery value and payments. Contingent payments for CDS, if any, are paid episodically once a default has been determined. This one-time payment equals the notional value of the issuer’s defaulted bonds minus their recovery value, creating significant “jump‑to‑default” risk. Although Index CDS uses standardized reference baskets, their contingent payments are still driven by the credit settlement mechanics used in single-name CDS and are calculated proportionally to the basket size.
Standardized Rate Swap Benchmarks
MDX Swaps and rate-style swaps use standardized index benchmarks rather than episodic credit events to determine floating rate payments. The MDX Index measures ongoing borrower credit performance in the U.S. mortgage market. The MDX Index does not measure actual defaults or liquidation; instead, the MDX Index records defined distress thresholds—seriously delinquent or modified1. By design, the MDX Index captures borrower stress before liquidation or final loss realization and avoids timing distortions caused by servicing, repurchase, foreclosure, and judicial timelines. Since borrower stress registers on a reference pool each performance period, the MDX Index reflects a monthly credit stress rate.
Similarly, SOFR is a New York Fed-administered benchmark measuring the ongoing cost of borrowing cash overnight collateralized by U.S. Treasury securities in the repo market. SOFR aggregates actual transactions, filters them, and reports the volume-weighted median rate each business day. While the definitions of credit events in CDS – failure to pay or filing for bankruptcy (among others) – are analogous to MDX, the frequency of their occurrence is not. The sporadic nature of credit events in an Index CDS basket of reference obligations does not pragmatically constitute a recurring periodic rate.
Borrower Performance Flow to Swap Payments
MDX measures borrower performance in three categories, which has implications for both fixed and floating payments on MDX Swaps. In the MDX Index, loans that prepay, perform, and experience credit stress are tracked, and these borrower events correspond with positive, neutral, and negative credit outcomes. When reference loans prepay in full, they definitionally cannot become credit events before the maturity of the MDX Swap. This credit positive outcome translates to the MDX Swap by fixing the prepaid portion of the notional amount used in the calculation of the fixed rate payment. Mortgages that are current (or less than four payments behind) are considered active reference loans, meaning the loans may still reach a definitive credit outcome – either prepay or a credit event. A credit event in MDX is determined through Ginnie Mae-reported serious delinquency or loan modification and is designed to measure borrower credit stress. Credit events feed formulaically into the MDX Index value and determine the floating rate payments. Furthermore, a derivative impact of both prepays and credit events is that they reduce the universe of active reference loans that can register a positive or negative credit outcome on the MDX Index.
In contrast to the three index impacts of MDX, interest rate swaps and CDS only have two: interest rate swaps exhibit bidirectional outcomes, and CDS reflect binary results in their fundamental payments. As the reference rate for an interest rate swap moves higher or lower, the periodic floating rate payment correspondingly adjusts up or down. CDS contingent payments are only made through the occurrence of credit stress – a reference obligor either defaults or does not. In the absence of a default, no structural mechanism exists to differentiate between credit positive and credit neutral events in CDS. CDS reference obligors retain the potential to experience a credit event – regardless of credit performance – until swap maturity2.
Benchmark Scale and Linear Movements
Each MDX Index Series references hundreds of thousands of equally weighted mortgage loans (i.e., individual mortgage loans). Given the size of the constituency, there is a continuous rate of reported borrower stress. Seriously delinquent or modified borrower status reports generate incremental changes in the borrower stress rate of the MDX Index. Similarly, the SOFR reference base involves reported transactions by over 2,000 institutions. The actual daily transaction reports used to determine SOFR regularly exceed $1 trillion and have averaged over $3 trillion in 2026 (Federal Reserve Bank of New York / ARRC). Due to the sheer size of each reference base, material changes in both the MDX Index and SOFR most likely occur when there are macro changes in financial conditions. Changes in the MDX Index and SOFR reference base tend to create smooth, proportional, linear movements in their respective rates period-over-period. Micro events within each reference base have muted impact – there is rarely “jump‑to‑default” behavior with instantaneous gain or loss.
Sources: Creditex/S&P Global, Vista Index Services
In contrast, Index CDS baskets consist of far fewer reference obligors – frequently ranging from 25 to 125. Contingent credit events on reference obligors in Index CDS produce settlement on affected names through credit event mechanics, and those events create the intermittent jump‑to‑default exposure that distinguishes Index CDS from MDX Swaps’ formulaic monthly notional adjustment. In practice, an Index CDS can go months – or a full term – without credit events, or it can experience several in the same month, exhibiting step-function patterns over time.
Conclusion
Taken together, these features show that the rate-style structure of MDX Swaps delivers major benefits for transferring risk on U.S. household credit performance. Fixed payments are exchanged monthly with floating payments derived from a published index measuring borrower stress across hundreds of thousands of loans. Data-driven credit events and payments correlate on a timely basis with borrower credit conditions. Index methodology and swap mechanics provide a linear return profile that mitigates jump‑to‑default risk. For market participants seeking standardized access to mortgage credit performance risk, MDX Swaps hold the potential to serve as the benchmark for a major segment of the U.S. debt markets.