Interest Rate Swaps

Mondo Visione  Sep 28  Comment 
The U.S. Commodity Futures Trading Commission (Commission) today expanded the existing clearing requirement for interest rate swaps. The Commission voted unanimously to approve an amendment to Commission regulation 50.4(a) that establishes a new...
Mondo Visione  Aug 16  Comment 
trueEX, the innovative global interest rate swap trading platform, has built a solution to provide execution for Brazilian Real (BRL) interest rate swaps cleared at CME Group. The launch follows CME Group’s Q4 2015 launch of BRL interest rate...
Benzinga  Jun 9  Comment 
Jamil Nazarali is head of execution services at Citadel Securities, a leading market maker that trades in equities, options and interest rate swaps for its retail and institutional clients. Nazarali recently sat down with Bloomberg to discuss...
Mondo Visione  Jun 2  Comment 
CME Group, the world's leading and most diverse derivatives marketplace, announced that Chicago Mercantile Exchange Inc. (CME) has been formally granted the status of Foreign Clearing Organisation (FCO) by the Prime...
The Economic Times  May 5  Comment 
In an electronically traded platform, investors maintain margins with the central counterparty, which will be much lower than the capital set aside for credit risk from OTC trades.
Mondo Visione  May 5  Comment 
TriOptima, the award-winning post trade infrastructure provider, announces that Eurex Clearing members completed the first successful triReduce compression cycle for cleared euro (EUR) interest rate swaps (IRS). This was the first collaboration...
Mondo Visione  Apr 18  Comment 
288 billion SEK in notional eliminated in Nasdaq Clearing’s first compression run for Interest Rate Swaps (IRS) In connection with the compression, backloading into Nasdaq Clearing (registering of historical trades to clearing) was commenced...
Mondo Visione  Mar 16  Comment 
Montréal Exchange (MX), Canada's leading derivatives exchange, today announced that it will expand its interest rate derivatives offering with the launch of Canadian Dollar Interest Rate Swap Futures based on the Eris MethodologyTM. These new...


The chart on the left is the 3 month interest rate swap.

Interest rate swaps are a common type of derivative security, which simply means that their value is “derived” from underlying assets (in this case, loans and interest rates). In a swap, two parties agree to exchange two streams of cash flow; in an interest rate swap, these cash flows are the interest payments for some given amount of money. The underlying money, known in this context as the notional amount, doesn't necessarily change hands. The two parties just exchange the interest payments they would make if they had actually borrowed the notional amount.

There are three main types of interest rate swaps, as determined by the type of rates being swapped:

  • Fixed-for-fixed swaps involve the exchange of interest payments that both carry fixed rates determined before the contract takes effect. Since there's no variability in either of the two rates, the payments will remain the same over the life of the swap contract. Fixed-for-fixed swaps are used when each party uses a different currency.
    • For example, suppose there are two companies in different countries, each of which wants to borrow money to build facilities in the other country, and that both can borrow at a lower interest rate in their home country. In this case, the companies can borrow money in their respective countries and swap with each other, essentially borrowing for each other. Each saves money by taking advantage of the other firm's lower cost of borrowing while also dodging currency conversion costs.
  • Fixed-for-floating, or "vanilla" swaps, commonly used as a type of investment, involve the exchange of a fixed interest payment for a floating interest payment. The payment with the fixed rate (known as the swap rate) doesn't change, while the payment with the floating rate is linked to some outside index (such as the LIBOR) and rises and falls throughout the duration of the contract.
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    • This type of swap can be used if a company wants to trade the floating rate on its debt for the stability of a fixed rate. In the example, Firm A has a floating rate loan but pays a fixed rate to Firm B. Firm B receives a fixed payment from Firm A and pays it a variable payment in return, which Firm A then pays to its lender. In this case, Firm A thinks that interest rates will rise and hopes to avoid higher payments by trading for a fixed rate. Firm B, on the other hand, probably thinks that rates will fall; if it's right, it will pay out less than the fixed amount it receives from Firm A, making a profit off the difference.
  • Floating-for-floating, or "Basis" swaps, as the name implies, involve the trade of interest payments that both have floating rates. The rates are based on different indexes, so each party is betting that either their original rate will rise, the other party's original rate will fall, or some combination of the two.

Interest rate swaps are traded over the counter (OTC), most commonly on fixed income desks at investment banks. Because they are not traded on open exchanges, interest rate swaps are not regulated by any government agency, so parties have a great deal of flexibility when setting the terms of the swap. Globally, the total notional amount of interest rate swaps outstanding was $309.6 trillion USD as of December 2007, accounting for 52% of the total OTC market.[1]

Interest Rate Swaps on Wikinvest


  1. Semiannual OTC derivatives statistics at end-December 2007 - Bank for International Settlements
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