Banks and other financial institutions are taking steps to look into transactions involving mis sold interest rate swaps. The focus is on identifying instances in which investors are provided with inaccurate information when and as they consider entering into a swap arrangement. By doing so, it is hoped that investors who have found out after the fact that the data provided was not complete or accurate will be able to reverse the deals and receive some sort of compensation that covers at least part of any losses sustained.

What is a Swap?

An interest rate swap is a type of financial transaction that occurs between two parties. Each party agrees to exchange future interest payments on specified assets with the other party. Agreements of this type are usually structured with a beginning and ending date, although the two parties can choose to leave the end date open if they like.

Structuring an interest rate swap involves the identification of specific interest bearing assets that each are owned in whole by each party. In addition, the interest generated by those assets must provide some perceived benefit to each party participating in the swap. Once the assets are identified and terms are worked out between the two parties, the swap can commence and continue for the period specified within the agreement’s terms and conditions.

 

What Can Be Accomplished With a Swap?

One of the more common strategies with an interest rate swap is to make an exchange that helps to minimize exposure for a certain period of time. At times, the goal is to use this approach to hedge against possible shifts in the economy that in turn has some effect on the average interest rate. For example, an investor may want to structure an exchange using an asset with a fixed rate of interest. He or she will search for another party who is willing to swap the interest on that fixed rate asset for one that carries a floating or variable rate of interest. This approach can often be practical if the LIBOR rate is expected to fluctuate significantly over the next several months.

In order for the swap to truly be successful, each party must benefit from the exchange. Along with helping to minimize exposure for a period of time, there is also the expectation that some sort of monetary gain will occur from the arrangement.

Example of Swapping Interest Rates

One of the easiest ways to understand interest rate swaps is to consider an example. Company A wants to loan funds, with the lending set with a fixed interest rate. Company B currently is able to manage loans at a fixed rate that is slightly lower than Company A. Company B can issue debt at its lower rate and then trade those obligations to Company A. Company A will then use variable or floating rate obligations as part of a swap with the fixed rate obligations issued by Company B.

If both parties have provided full disclosure about the particulars of the arrangement and they have agreed to use a standard for the floating rate, such as the LIBOR rate, then there is the chance for everyone to benefit. Both parties share the cost of the lending structures, something that helps to increase their net profits from the swap.

 

 

Why are the Banks Recruiting Additional Staff?

One of the reasons that banks are beginning to devote more staff to evaluating swaps is that the data supplied to potential investors has not always been as comprehensive as it should be. This can often lead to a situation in which investors are not provided with all the information they need to make informed decisions about the swap opportunities. As a result, an investor may assume that a given deal is worth the time and effort when in fact there are compelling reasons to avoid creating a swap using the two assets involved.

By creating teams who are capable of reviewing the particulars of specific swaps, it is possible to determine if both parties received sufficient and correct information to make an informed decision before entering into the arrangement. It is also possible to determine if certain key facts were left out of the discussions or even if information that was not exactly correct was introduced into the negotiations. Essentially, the function revolves around making sure there were no improprieties involved with the swap. When irregularities are identified, the bank can take steps to make sure the injured party is compensated.

Is Swap Mis Selling Really a Big Problem?

While many interest rate swaps are conducted in a completely professional manner and include full disclosure, that is not always the case. At times, the omission of essential data is unintentional. At other times, data is omitted on purpose. These unfortunate situations occur often enough that banks are beginning to realize that some sort of review process is necessary. Additional staff who are well versed in the specifics of interest rate swapping on derivatives and other investment options can help to minimize the possibility of investors entering into swaps without knowing all the pertinent facts.

There is a difference of opinion when it some to just how often mis selling occurs with interest swap agreements. Banks who are actively recruiting more staff vary in their estimates of how much compensation will ultimately be issued. What is certain is that more banks are recognizing there is a problem and are taking steps to isolate the issues and see that investors are fairly compensated when mis selling has indeed taken place.


Interest Rate Swaps Resource

Small Business Disillusioned with mis-sold Interest Rate Swaps

Many businesses have become disillusioned due to the compensation schemes set aside for the interest rate swap mis-selling derivatives. The Financial Services Authority has agreed to look into the cases of the mis-sold financial products of the big four banks (Barclays, Royal Bank of Scotland, Lloyds, and HSBC). There are several other banking institutions that have become involved in this Swap claims dilemma, also.

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£10m Interest Rate mis-selling complaint against Lloyds by Alan Sugar

Lord Alan Sugar has sent a formal letter of complaint to Lloyds Bank for “mis-selling” of an Interest Rate hedging product. The apparent Break free sum amounts to £10m which was attached to the interest rate hedging product Lord Sugar used on his property.

The derivative was to protect against interest rate rises on a £97m Lloyds loan. Lord Sugar is undersatood to be considering legal action if the complaint is unsuccessful

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Interest Rate SWAP Claims

Maple Leaf Financial have a specialist team of solicitors dedicated to dealing with the mis-selling of interest rate swap protection products by the banks. We are happy to review these relatively complex swap arrangements and to claim compensation for our clients where appropriate.

If you believe you have incorrectly been classified as a ‘sophisticated’ customer and have, therefore, not been eligible for interest rate swap redress. Maple Leaf Financial will review your interest rate product and we will be happy to discuss your individual concerns and requirements

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Tim Capper reports on Financial Mis-Selling for Maple Leaf Financial. Our aim is to ensure you get honest advice and proper guidance to ensure a suitable recommendation can be made to pursue a financial claim

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Tim Capper

Bringing you financial news and information in plain english for Maple Leaf Financial. My aim is to help readers understand these often complex financial instruments.