A swap is defined technically in function of the following factors:
- The start and end dates of the swap.
- Nominal: The amount upon which the payments of both parties are calculated.
- Interest rate or margin of each of the contracting parties.
- Index of reference for the variable part.
- Periodicity or frequency of payment.
Calculation base of each party: the way in which interest payments are calculated, basically defining how the days between the two dates are counted.
In the most common type of swap, a fixed interest rate is paid in exchange for receiving a variable rate. This variable rate is linked to a reference rate; in Europe, the Euribor is the most common one.
The market for swaps
When we talk about the digital banking and fintech revolution, the first thing that springs to mind are the thousands upon thousands of apps developed for retail banking customers: Means of payments, funding, microcredit… However, digitization in wholesale banking is also becoming a reality, especially on the side of the development of digital channels aiming to offer more products and functionalities to business, corporate and institutional customers.
The market for swaps represents 80% of the global derivatives market and amounted to $320 trillion at the end of 2015. Since these products are generally adapted to the needs of the client and not easily standardized, so as to be traded on an exchange, the swap market has always been considered an Over the Counter Market. However, the swap market is one of the largest, most liquid and most competitive in the world.
In spite of these characteristics, it has not escaped digitization in recent years and a large percentage of the most common contracts are negotiated electronically through platforms such as Bloomberg, Tradeweb or individual brokers’ platforms.
The swap market is undergoing a process of important regulatory changes, in an effort to provide greater transparency and access to information, and to reduce systemic risk.
