Interest rate swaps
About this course
How OIS and IRS work, when LAs are permitted to use them, ISDA documentation basics, hedge accounting considerations. Includes the historical context of LA derivative usage.
What you'll learn
- What swaps are
- Use cases (theoretical)
- Hazell + legal framework
- ISDA, CSA, accounting
- Should we use swaps?
Part of these pathways
Related courses
- SONIA Forward Curve & OIS
- Money Market Funds (CNAV / LVNAV / VNAV)
- Short-duration bond funds & VNAVs
- Intra-LA borrowing & lending markets
- DMADF deep dive
- Term deposits, CDs & T-Bills
Common questions
What is CSA (Credit Support Annex)?
Annex to the ISDA Master Agreement specifying collateral arrangements. Modern CSAs require daily margining — the party whose swap position is out-of-the-money posts cash collateral to the counterparty. Operationally significant for LA cashflow.
What is Fixed leg?
The party paying (or receiving) a fixed rate for the life of the swap. Set at swap inception based on prevailing rates and the swap's tenor. Most LAs would use swaps to convert variable-rate exposure to fixed (paying fixed, receiving floating) or vice versa.
What is Floating leg?
The party paying (or receiving) the variable rate, recalculated each reset period against a reference rate. Modern sterling swaps reference SONIA; older swaps referenced LIBOR (transitioned 2021-2022).
What is Hedge accounting?
IFRS 9 framework for accounting for derivatives that hedge specific exposures. Allows the derivative's P&L impact to be matched to the hedged item, smoothing volatility. Strict documentation requirements. For LAs without it, all derivative gains/losses go straight through I&E — impractical. With it, complex but workable.
What is IRS (Interest Rate Swap)?
Bilateral derivative contract where two parties exchange interest cash flows on a notional principal — typically one party pays a fixed rate and receives floating, the other does the opposite. No principal exchange. The fundamental interest-rate hedging instrument.
What is ISDA Master Agreement?
Standard framework agreement governing OTC derivative transactions, published by the International Swaps and Derivatives Association. Covers credit terms, collateral, default events, close-out netting. Required for any LA wanting to do bilateral swaps; takes weeks to months to negotiate; specialist legal advice essential.