Glossary: Swap Market Terms

This glossary provides concise definitions of swap market terms used throughout the Swaps and OTC Derivatives series. Terms are alphabetized for quick reference.

Terms A-C

Accrued interest: Interest accumulated since the last payment date; included in termination calculations.

Basis point (bp): One-hundredth of one percent (0.01%); standard unit for quoting swap spreads and rates.

Basis risk: Risk that the hedge instrument and hedged item move differently; arises when indices or tenors differ.

Basis swap: Exchange of two floating rates (e.g., SOFR for EURIBOR); used to hedge basis risk.

Bilateral swap: OTC derivative between two counterparties without central clearing; subject to ISDA documentation.

CCP (Central Counterparty): Clearinghouse that stands between buyer and seller, guaranteeing trade performance.

Cleared swap: Derivative processed through a CCP, with the clearinghouse becoming counterparty to both sides.

Close-out: Termination of all transactions under an ISDA following an Event of Default.

Close-out amount: Net payment calculated upon early termination; based on replacement cost methodology.

Collateral: Assets posted to secure derivative obligations; reduces counterparty credit exposure.

Compression: Process of eliminating offsetting trades to reduce gross notional and trade count.

Confirmation: Document specifying economic terms of a specific trade; references ISDA Master Agreement.

Counterparty risk: Risk that the other party defaults before fulfilling contractual obligations.

Credit Support Annex (CSA): ISDA annex governing collateral exchange; specifies thresholds, eligible assets, and procedures.

Cross-currency swap: Exchange of principal and interest in different currencies; involves FX and rate risk.

CVA (Credit Valuation Adjustment): Adjustment to derivative value reflecting counterparty default risk.

Terms D-H

Day count convention: Method for calculating interest accrual; common types include Actual/360, 30/360.

Default fund: CCP capital reserve funded by clearing members; absorbs losses beyond defaulting member's margin.

Dodd-Frank: US legislation (2010) requiring swap reporting, clearing mandates, and SEF execution.

DV01: Dollar value of one basis point; measures interest rate sensitivity.

DVA (Debt Valuation Adjustment): Adjustment reflecting own default risk; symmetric to counterparty's CVA.

Effective date: Start date of swap cash flows; typically T+2 from trade date.

EMIR (European Market Infrastructure Regulation): EU regulation requiring trade reporting, clearing, and risk mitigation.

€STR (Euro Short-Term Rate): Euro overnight reference rate published by ECB; replaced EONIA.

Event of Default: ISDA-defined triggers (e.g., bankruptcy, failure to pay) allowing early termination.

Exposure: Amount at risk if counterparty defaults; current exposure is today's positive MTM.

FCM (Futures Commission Merchant): Broker providing clearing services for exchange-traded and cleared derivatives.

Fixed leg: Swap leg paying predetermined fixed rate; DV01 negative for fixed payer.

Floating leg: Swap leg paying variable rate based on index (SOFR, EURIBOR); resets periodically.

Forward rate agreement (FRA): Contract to exchange fixed rate for floating rate at future date; single-period swap.

FVA (Funding Valuation Adjustment): Adjustment for funding costs of uncollateralized derivative positions.

Haircut: Discount applied to collateral value; accounts for potential price decline.

Terms I-N

IM (Initial Margin): Collateral posted at trade inception to cover potential future exposure during close-out.

ISDA: International Swaps and Derivatives Association; publishes standard documentation.

ISDA Master Agreement: Standard contract governing bilateral OTC derivative relationships.

ISDA SIMM: Standard Initial Margin Model; risk-based methodology for calculating bilateral IM.

LEI (Legal Entity Identifier): 20-character code uniquely identifying legal entities in derivatives transactions.

Leverage: Using derivatives to achieve exposure greater than capital deployed.

Mark-to-market (MTM): Current fair value of a derivative position.

Margin call: Request to post additional collateral when exposure exceeds thresholds.

Maturity date: Final date of swap cash flows; when notional exchange occurs (if applicable).

Minimum Transfer Amount (MTA): Smallest collateral transfer required; reduces operational burden.

Modified Following: Business day convention adjusting payment dates forward unless crossing month-end.

Multilateral compression: Compression involving multiple counterparties; maximizes notional reduction.

Netting: Offsetting positive and negative exposures within an ISDA relationship; reduces gross to net.

Notional principal: Reference amount for calculating swap payments; not exchanged in standard IRS.

Novation: Transfer of swap position from one party to new counterparty; requires all-party consent.

Terms O-S

OTC (Over-the-Counter): Derivatives traded bilaterally rather than on exchange.

Par swap rate: Fixed rate that makes swap value zero at inception.

Pay fixed: Direction where party pays fixed rate and receives floating.

PFE (Potential Future Exposure): Quantile of future exposure distribution; used for credit limits.

Plain vanilla: Standard, non-customized swap structure (e.g., fixed-for-floating IRS).

Portfolio reconciliation: Process of comparing trade records between counterparties.

Receive fixed: Direction where party receives fixed rate and pays floating.

Rehypothecation: Right to reuse posted collateral; typically allowed for VM, not for IM.

Replacement cost: Cost to enter equivalent trade with new counterparty; basis for close-out.

Reset date: Date when floating rate is determined for upcoming period.

Schedule: ISDA document customizing Master Agreement terms for specific relationship.

SDR (Swap Data Repository): Registered entity collecting and maintaining swap trade data.

SEF (Swap Execution Facility): CFTC-regulated trading platform for swap execution.

Single agreement concept: All trades under ISDA treated as one agreement for netting and close-out.

SOFR (Secured Overnight Financing Rate): USD overnight reference rate based on Treasury repo transactions.

Spread: Additional basis points added to floating rate (e.g., SOFR + 50 bps).

Step-in/Step-out: Entering or leaving a cleared position through clearing member.

Swap: Agreement to exchange cash flows; most commonly interest rate or currency swaps.

Swaption: Option to enter into a swap at predetermined terms.

Terms T-Z

Tenor: Duration of swap from effective date to maturity.

Termination: Ending a swap before maturity through mutual agreement or event trigger.

Termination Event: ISDA-defined triggers (e.g., illegality, tax event) allowing termination.

Threshold: Unsecured exposure permitted before collateral posting required.

Total return swap (TRS): Exchange of total return on reference asset for financing rate.

Trade date: Date swap is executed; typically T-2 to effective date.

Trade repository: Entity receiving regulatory reports of derivative transactions.

Unwind: Terminating a swap position through cash settlement.

UTI (Unique Transaction Identifier): Code uniquely identifying a derivative transaction for regulatory reporting.

Valuation Agent: Party responsible for calculating collateral requirements under CSA.

Variation Margin (VM): Collateral exchanged daily to cover current MTM exposure.

Wrong-way risk: Correlation between counterparty default and increased exposure.

XVA: Collective term for valuation adjustments (CVA, DVA, FVA, KVA, MVA).

Abbreviations

Related Articles

For plain vanilla swap mechanics, see Plain-Vanilla Interest Rate Swaps Mechanics.

For cross-currency structures, review Cross-Currency Swaps and Basis Risk.

This glossary is updated quarterly to reflect evolving terminology and market conventions.