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.