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 have created this Interest Rate Swap Glossary as an information guide to help you understand associated Swap terminology

Interest Rate Swaps

An interest rate swap is an over-the-counter derivative contract in which interest income streams based on a notional amount of principal are exchanged between two counterparties. The future stream of interest payments are exchanged for a defined period of time in the swap agreement.

Although these interest payments are calculated from a notional principal amount, there is rarely an actual exchange of the principal from the underlying debt. A rare example of an interest rate swap that exchanges the notional amount is a cross-currency interest rate swap wherein a final exchange rate for the notional principal is confirmed upon entering the transaction.

The typical “vanilla” interest rate swap exchanges either a stream of fixed-rate interest payments for floating-rate payments or between two variable interest rate payments. The swap rate is the defined fixed rate that is exchanged for a nominated floating rate. Variable interest rate payments are typically referenced by a benchmark such as LIBOR. An interest rate swap has the effect of converting one interest rate basis into another, and the spread between the two interest payments becomes the actual amount exchanged.

Financial institutions and companies use interest rate swaps to manage risks, mitigate the effects of interest rate volatility, and speculate on interest rates


Interest Rate Swap Glossary


Abandonment: A process that allows an option to expire.

Accreting swap: A swap that has an increasing credit amount over time.

Accrued interest: The amount of interest accrued from the start of an investment until the present reporting period.

Amortising Swap: An interest rate swap with a reduction in the notional principal amount that is co-ordinated with amortisation of the underlying debt during a specific time interval


Basis Swap: An interest rate swap with both counterparties using different floating-rate benchmarks as references from which interest payments are derived.

Bond: A debt certificate purchased typically for a long-term investment. Subject to the terms of the bond issuer and typically paid using a fixed principal amount until a given date in the future.

Business Day Convention: Procedures that make adjustments for interest accrual and payment dates that are scheduled for days when business is not conducted.


Calculation period: Days between payment dates.

Call option: This option allows a buyer to purchase an option on or before a set date; the asset purchased must be delivered at the striking price by the asset holder on the agreed date.

Cancellable Swap: An interest rate swap that contains the right for one of the counterparties to cancel the swap on a specific date.

Cash market: The trade of non-derivative assets, including bonds and equities.

Cash settlement: Discharge of obligation by both parties in the form of cash.

Collateral: An asset provided by either party to a counter party that is designed to protect against potential financial loss or credit obligations.

Correlation: A measure that shows the relationship between financial instruments and market activity.

Correlation Swap: A swap of assets or investments that happens only when the correlation between value and market activity is negative.

Credit Default Swap: A swap regarding the credit exposure of a particular debtor or a specific lending product. Credit protection is issued to the buyer, and the seller reduces their risk associated with the credit product or debtor.

Cross Currency Swap: An interest rate swap with coupon payments denominated in two different currencies. An exchange rate for settlement of the notional principal amount is determined by mutual agreement when the counterparties enter the transaction.


Day Count Fraction:  The method for calculating the interest payment amount and present value of the coupon for the time interval in which the interest is accrued. The common calculation is for the actual number of interest accrual days in the numerator divided by the standard 360 days in the denominator.

Default: A failure to pay financial obligations due as part of a derivative contract.

Delivery: The transfer of a derivative from seller to buyer.

Delta: A change in the value and price of a financial instrument.

Derivative: Transfers risk between parties and derives its value from the price or going rate of a financial instrument. Can include loans, bonds, currencies, commodities, equities, markets, rates, and physical assets.


Early closure: The early end of a business or trading day.

Effective Date: The date interest payments begin to accrue for an interest rate swap.

Equity swap: A contractual derivative that derives its value from underlying equity or an equities index.

EURIBOR: The rate of interest banks charge each other for loans in the European Union interbank market. The term is an acronym for European Interbank Offered Rate. EURIBOR is set daily by the European Banking Federation

Eurobond: Bonds that are sold in a currency other than the one used by the issuer. Typically used when bonds occur between the US and UK, or Eurozone nations and others.

European option: This option can be exercised only on the expiration date.

Exchange: The exchange on which a financial instrument is currently being traded.

Exchange business day: The operational hours of any financial exchange around the world in respect to active trading times and activities.


Financial future: A contract based on the appreciation or depreciation of an investment tool during the next trading period.

Fixed rate: An interest rate that does not change.

Floating rate: This interest rate is reset at given intervals and is typically tied to a market rate like LIBOR and others.

Floor: The lower limit of a trade’s value.

Following business day convention: Allows a payment made on one business day to roll over to the following business day regardless of whether or not it is in the current month or the next month.

Foreign exchange derivative: This derivative is underwritten by foreign currencies.


Global clearing: Funnels futures and options trades through a single clearinghouse worldwide.

Grace period: A period during which a borrower can make missed interest or principal payments.

Guarantor: Individual who agrees to meet certain financial obligations if the primary party to a trade cannot do so.


Hedging: This trading strategy is designed to reduce risk by entering into two transactions where the second offsets the risk of the initial transaction.

Hybrid basket: A “basket” that has both stocks and indices underlying a number of assets or asset clauses.


Interest rate swap: This agreement involves exchanging interest rate cash flows based on a specific amount of interest that is tied to a floating or fixed rate. These swaps are typically versatile enough to be used both for speculation and for hedging other bets and risks within an index.

Inverse Floater: An interest rate swap with a floating-rate payment which is derived from an inverse correlation with a specific floating interest rate index.

Issuer: The borrower who issues a bond, typically a national government or a major corporation securing its debt.


Ladder option: This option locks in all gains after the underlying asset has met a defined benchmark.

Leverage: Magnifies losses or gains based on paying a partial price of the underlying asset or investment taken on by the seller or buyer.

LIBOR: Stands for the “London Inter-Bank Offered Rate,” and is used to dictate the interest rate used when institutions lend to one another.


Margin: The money needed to provide protection against potential default by a party in an investment.

Master Confirmation Agreement: The agreement between two parties that defines terms, conditions, benchmarks, and rates, that will seal the relationship between those parties during an investment.

Modified Following: A procedure for coupon payments similar to Following. This Business Day Convention uses the last good business day of a month for a payment date when the next good business day after a holiday or weekend falls in the following month.

Mutual termination clause: This mutually agreed upon clause permits both parties to end an agreement or trade under predefined circumstances, typically tied to a floor in the investment’s value.


Note: Issuer’s short-term debt agreement that allows cash to be exchange for periodic payments or deliveries to the buyer.

No Adjustment: Coupon payments are calculated based on all days in a specific interval without adjustments for holidays and weekends under this Business Day Convention.

Notional Amount: The underlying principal amount from which coupon payments for an interest rate swap are derived using either fixed or floating interest rates.

Novation: A procedure for a counterparty to transfer existing obligations of an interest rate swap to a new counterparty that enters the contract with the original remaining counterparty.


Option: The right to buyer or sell a financial instrument at a given price during American, European, or other business owners. Not an obligation to do so.


Partial termination: Reduces the notional amount of a contract used to buy or sell derivatives.

Path Dependent: A swap that contains a payment derived from an increase or decrease in the underlying benchmark interest rate.

Preceding Business Day Convention: A procedure for adjusting interest accrual calculations and payment dates to the day prior to a holiday or weekend.

Premium: The amount of money paid to the seller in order to buy an option and enjoy the associated rights of ownership.

Protection seller: The counter party in a credit default swap that is responsible for bearing the risk of the investment, turning that risk into profit and compensation for the swap holder.


Quanto Swap: An interest rate swap that contains a notional principal amount denominated in a domestic currency and one counterparty paying variable-rate payments indexed to a floating foreign interest rate. Also known as a Differential Swap.


Range Accrual Swap: An interest rate swap that calculates the variable-rate payment based on the accrued interest on the number of days in which the benchmark floating-rate index was within a specified range. For example, if LIBOR is observed within a predefined range for 81 days of a 90-day payment interval, the floating-rate payment will only include the interest accrued on those 81 days.

Ratchet Swap: An interest rate swap that allows a variation beyond a predetermined value for the underlying floating interest rate to incrementally adjust the fixed-rate counterparty payment for specified intervals. For example, the fixed-rate payment would drop incrementally if LIBOR dropped further than a predetermined amount within a specific time period.

Rebate amount: Amount paid in the event of an automatic knock-out.

Receiver: Gives the buyer a right to sell his or her protection at a predetermined date.

Reverse Floater Swap: A variable-rate coupon payment that rises or falls in an inverse correlation to the specified floating interest rate benchmark for which it is assigned. For example, a reverse floater swap using LIBOR as a benchmark would pay a higher coupon as LIBOR fell and a lower coupon payment when LIBOR rises. Also known as an Inverse Floater Swap.

Residential Mortgage Backed Security: A security that derives its value from the value of mortgage debt, home equity loans, and mortgages issued at subprime interest rates in a given market.

Reset date: The date when a swap’s payment terms become active and effective.

Restructuring: When a company restructures its debt to permit for more efficient payment and a better financial picture afterward.


Scheduled termination date: The date when a derivative contract expires.

Scheduled trading day: A day when the stock exchange is open and trading is ongoing during regular business hours.

Settlement: A process that discharges derivative obligations through payment or delivery.

Short: Selling a borrowed commodity, currency, or security, because it is expected to decrease in value.

Sovereign: A national government or agency acting as a borrower.

Spot price/rate: A commodity’s price when needed for immediate delivery.

Spread: The difference between the swap rate and the floating interest rate benchmark used for a particular interest rate swap. For example, the spread for a standard vanilla swap based on LIBOR would be the difference between its swap rate and LIBOR.

SSI: The “Standard Settlement Instructions” for a derivative and associated transactions.

Subprime: Refers to a lending product offered to a consumer or business client at an interest rate below the government’s declared prime rate.

Succession event: A merger or other activity that causes one entity to transfer its obligations to another, typically used in business transactions and corporate breakups.

Swap: Two parties use this derivative to exchange cash flows with each other in order to minimise risk and improve returns.

Swapclear: The London Clearing House service that accepts intermediate counterparty risk upon trade execution to clear interest rate swap and other over-the-counter derivative trades by becoming the legal counterparty until the transaction is finalised.

Swaption: The option to engage in a swap at a later time.


Target Redemption Note: A note redeemed at part when all aggregate coupons paid as a condition of that note reach a predetermined target price.

Term sheet: A document that defines the terms and conditions of entering into a specific type of financial transaction, or into a partnership for the purchase of swaps and other derivatives. It is not a binding contract to engage in those trades, however.

Theta: Measures the “time decay” of an option or its value.

Threshold: The amount of exposure that any party is willing to accept before it relies on provided collateral.

Trade date: The date when a trade was made in accordance with the terms of the investment.

Trading disruption: An event that halts or otherwise disrupts trading.


Valuation agent: An individual responsible for valuing a derivative or portfolio, generally in order to demand payment of collateral from the buyer.

Valuation date: The date when a collateral call is made or the value of an asset is determined by the valuation agent.

Valuation time: The time when a collateral balance is valued.

Vanilla Swap: The term used to describe the most common interest rate swaps that either exchange a fixed-rate interest payment for a variable-rate payment or between two floating-rate payments.


Warrants: This option underlies a given asset in the form of transferrable currency that can be placed on an exchange.


Yield to maturity: The amount of interest that a bond would compound and pay annually if held by the buyer until the maturity date of that bond.


Zero Coupon Swap: A floating-rate payment is paid in regular intervals by one of the counterparties throughout the term of the contract. Upon maturity, the other counterparty makes a full payment settlement of the entire balance of fixed-rate payments accrued during the term of the swap.

Interest Rate Swap Claims News

Interest Rate Swaps: Barclays Bank, Fair and Reasonable Redress

Certain interest rate hedging products (IRHPs) have come under question by current banking customers and by several banking agencies within the U.K. These banking products are structured collar financial products that are frequently used to hedge against future interest rate expenses. These complex structured collars were sold to numerous loan customers during the period of time before the great international recession. This financial downturn across the international financial markets created unusual interest rate returns for many of the structured collars sold to Barclays Bank customers.

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Preparing Businesses for an Interest Rate Swap Claim

The interest rate swap mis-selling fiasco has garnered a lot of attention during the past year. Over 12 months after the first cases went up for review, the claimants are just now receiving the compensation they deserve. Although it may seem like businesses around the country are now experiencing financial windfalls, there is much work that needs to be done before anyone can expect to receive compensation from their interest rate swap mis-selling claims. It has become quite clear that the process is much more involved than a PP mark-II.

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Interest Rate Swaps: Natwest, Fair & Reasonable Redress

Natwest Bank in London has begun a direct redress program for those small businesses affected by several interest rate swap products. These interest rate swap products or structured collars were sold to small businesses as a hedge against any risk associated with the interest rate markets. The small businesses or unsophisticated businesses were allowed to purchase these products. The 2008 financial crisis caused many of these hedging products to be of little value against interest rate changes. Small businesses were left with a financial bill that was significantly burdensome.

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FCA Interest Rate Swap Flow Chart

Derivatives may be one of the most complicated financial investments on the market. The Financial Conduct Authority (FCA) has created a chart to help consumers, barristers and bureaucrats understand whether a potentially mis-sold Interest Rate swap Hedging Product (IRHP) can be reviewed.

The Financial Conduct Authority (FCA) Interest Rate Flow Chart uses a flow diagram with “Yes/No” questions to show whether a debtor qualifies for regulatory review.

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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.