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Swap (finance)
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Swap (finance)
In finance, a swap is a derivative contract between two counterparties to exchange, for a certain time, financial instruments, unconventional cashflows, or payments. Most swaps involve the exchange of interest rate cash flows, based on a notional principal amount.
Unlike future, forward or option contracts, swaps do not usually involve the exchange of the principal during or at the end of the contract. In general, one cash flow, or leg, of the swap is generally fixed, while the other is floating and determined by an uncertain variable such as a benchmark interest rate, a foreign exchange rate, an index price, or a commodity price.
Swaps are primarily over-the-counter contracts between companies or financial institutions. Retail investors do not generally engage in swaps. They are often used to hedge certain risks, such as interest rate risk, or to speculate on the expected direction of underlying prices.
Swaps were first introduced to the public in 1981 when IBM and the World Bank entered into a swap agreement. Today, swaps are among the most heavily traded financial contracts in the world; the total amount of interest rate and currency swaps outstanding was more than $348 trillion in 2010, according to Bank for International Settlements.
Most swaps are traded over-the-counter and are drafted specifically for the counterparties. The United States's Dodd-Frank Act in 2010, however, established a multilateral platform for swap quoting, the swaps execution facility, mandating that swaps be reported to and cleared through exchanges or clearing houses. This subsequently led to the formation of swap data repositories (SDR), a central facility for swap data reporting and recordkeeping. Data vendors, such as Bloomberg, and large exchanges, such as the Chicago Mercantile Exchange, were among the first to register as SDRs. Other exchanges followed, such as the IntercontinentalExchange and Frankfurt-based Eurex AG.
According to the 2018 SEF Market Share Statistics, Bloomberg dominates the credit rate swap market with 80% share; TP dominates the FX dealer to dealer market (46% share); Reuters dominates the FX dealer to client market (50% share); Tradeweb is strongest in the vanilla interest rate swap market (38% share); TP is the biggest platform in the basis swap market (53% share); BGC dominates both the swaption and XCS markets; Tradition is the biggest platform for caps and floors (55% share).
While the market for currency swaps developed first, the interest rate swap market has surpassed it, measured by notional principal, "a reference amount of principal for determining interest payments."
The Bank for International Settlements (BIS) publishes statistics on the notional amounts outstanding in the OTC derivatives market. At the end of 2006, this was USD 415.2 trillion, more than 8.5 times the 2006 gross world product. However, since the cash flow generated by a swap is equal to an interest rate times that notional amount, the cash flow generated from swaps is a substantial fraction of but much less than the gross world product—which is also a cash-flow measure. The majority of this (USD 292.0 trillion) was due to interest rate swaps. These split by currency as:
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Swap (finance)
In finance, a swap is a derivative contract between two counterparties to exchange, for a certain time, financial instruments, unconventional cashflows, or payments. Most swaps involve the exchange of interest rate cash flows, based on a notional principal amount.
Unlike future, forward or option contracts, swaps do not usually involve the exchange of the principal during or at the end of the contract. In general, one cash flow, or leg, of the swap is generally fixed, while the other is floating and determined by an uncertain variable such as a benchmark interest rate, a foreign exchange rate, an index price, or a commodity price.
Swaps are primarily over-the-counter contracts between companies or financial institutions. Retail investors do not generally engage in swaps. They are often used to hedge certain risks, such as interest rate risk, or to speculate on the expected direction of underlying prices.
Swaps were first introduced to the public in 1981 when IBM and the World Bank entered into a swap agreement. Today, swaps are among the most heavily traded financial contracts in the world; the total amount of interest rate and currency swaps outstanding was more than $348 trillion in 2010, according to Bank for International Settlements.
Most swaps are traded over-the-counter and are drafted specifically for the counterparties. The United States's Dodd-Frank Act in 2010, however, established a multilateral platform for swap quoting, the swaps execution facility, mandating that swaps be reported to and cleared through exchanges or clearing houses. This subsequently led to the formation of swap data repositories (SDR), a central facility for swap data reporting and recordkeeping. Data vendors, such as Bloomberg, and large exchanges, such as the Chicago Mercantile Exchange, were among the first to register as SDRs. Other exchanges followed, such as the IntercontinentalExchange and Frankfurt-based Eurex AG.
According to the 2018 SEF Market Share Statistics, Bloomberg dominates the credit rate swap market with 80% share; TP dominates the FX dealer to dealer market (46% share); Reuters dominates the FX dealer to client market (50% share); Tradeweb is strongest in the vanilla interest rate swap market (38% share); TP is the biggest platform in the basis swap market (53% share); BGC dominates both the swaption and XCS markets; Tradition is the biggest platform for caps and floors (55% share).
While the market for currency swaps developed first, the interest rate swap market has surpassed it, measured by notional principal, "a reference amount of principal for determining interest payments."
The Bank for International Settlements (BIS) publishes statistics on the notional amounts outstanding in the OTC derivatives market. At the end of 2006, this was USD 415.2 trillion, more than 8.5 times the 2006 gross world product. However, since the cash flow generated by a swap is equal to an interest rate times that notional amount, the cash flow generated from swaps is a substantial fraction of but much less than the gross world product—which is also a cash-flow measure. The majority of this (USD 292.0 trillion) was due to interest rate swaps. These split by currency as: