Now the first question to answer is what is a swap?
A swap is a contract in which the parties to it exchange liabilities on outstanding debts, often exchanging fixed interest-rate for floating-rate debts (debt swap) as a means of managing debt. In finance, a swap is a derivative in which counterparties exchange certain benefits of one party's financial instrument for those of the other party's financial instrument. In most cases banks will promote swaps in order to sell a fixed rate financing vs. a variable rate structure.
Swaps initially originated in the United Kingdom as a means of avoiding foreign exchange controls in the 1970’s.
As the popularity and the use of swaps grew worldwide as banks not only realized that they could manage their risks more efficiently through the use of swaps but in acting as a “middleman or broker” in swap transactions they could generate large profits and additional revenue earning fees on swap transactions. Since that time swaps have become big business as the larger banks not only will act as the middle man but will also be the counterparty that buys the swap. Swaps have become so popular that even municipalities have incorporated swaps in managing their debt.
Seeing the potential for another revenue stream and source of great profits, the larger banks entered in the swap markets in the mid-90’s and basically their objective was to sell swaps to their clients as a fixed rate protect.
Even in today’s market, the Banks continue to promote the sale of swaps as part of the financing for their clients.
If you want to level or change the playing field in an existing swap / derivative contract then contact us.