ISDAFIX is calculated by working out what mid-price you would get if you were to fill a trade of Standard Market Size (SMS) using the best prices available on regulated electronic trading venues at the relevant times and in the relevant currencies and tenors.
Key features of the calculation are:
- Volume Weighted Average Mid Prices (VWAMP) from Synthetic Order Books at Snapshots in Time: the calculation is based on finding the VWAMP from theoretically filling a trade in SMS on both the bid and offer side at a particular instant in time (a snapshot). At each snapshot, we combine prices and volumes from trading venues to create a synthetic order book that represents the best prices (and accompanying volumes) available in the market at that time. We then calculate the volume weighted prices at which you could fill a trade in SMS from this synthetic order book on both the bid and offer side and these prices are used to calculate the VWAMP.
- Multiple Snapshots: instead of using just one snapshot at a pre-determined time to create the VWAMP, IBA uses multiple, randomised snapshots taken in a short window before the calculation. This makes the benchmark more robust against attempted manipulation and momentary aberrations in the market.
- Liquidity Checks: illiquid snapshots are not included in the calculation – any snapshots that can’t fill the SMS (on both the bid and offer side) are discarded, so only VWAMPs from reasonably sized trades are included in the calculation.
- Outlier Checks: to protect against momentary and unrepresentative spikes in price, outlier snapshots are not included in the calculation. The snapshots that pass the liquidity checks are ranked in order of their VWAMPs and the snapshots higher than the 75th percentile and lower than the 25th percentile are discarded leaving only the most representative snapshots.
- Quality Weighting: IBA combines the remaining VWAMPs into a final price (ISDAFIX) using a quality weighting. Snapshots with tighter spreads between the volume weighted bid and volume weighted offer are given a higher weighting because they have more volume executable closer to the mid-point, and therefore are indicative of a better quality market.