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Interest-rate swaps: trading floating payments for fixed
Since the early 1980s· Asset or instrument
Fact, law or dataA rule, statute, definition or measured number.
A contract in which two parties trade interest payments on a set amount: one pays a fixed rate, the other a floating one.
See it on the Money & Finance map →How it works
No principal changes hands; the 'notional' amount just sizes the payments. Say the notional is $10 million, the fixed rate 4% and SOFR 4.3%. The fixed payer owes 4% and receives 4.3%, so only the net 0.3%, $30,000 a year, is paid, to the fixed payer. If rates rise, the fixed payer's side gains value; if they fall, it loses. Banks, insurers, companies and property owners use swaps to hedge. The first famous swap was a 1981 IBM–World Bank currency deal; interest-rate swaps followed quickly.
Why it matters
They are the main tool for turning floating debt into fixed, and the largest derivatives type: interest-rate contracts, mostly swaps, are about four-fifths of all OTC derivatives by notional value (BIS).
Think of it like
Like trading a market-rate lease for a flat-rent lease with another landlord: no buildings move, only the rent risk does.
Facts, rules and data
BIS semiannual derivatives statistics, swap data repositories required since Dodd–Frank, and ISDA's standard contracts and market surveys.
Debates and risks
Notional amounts overstate risk; how much real exposure sits in swaps, and with whom, is hard to measure.
Inside this (1)
Connections (7)
▸Fixed vs. floating rates on property loans can be converted using Interest-rate swaps: trading floating payments for fixedFact, law or data
The connection
A borrower can get a fixed cost without a fixed-rate loan: take the floating loan, then enter a swap that pays it floating and charges it fixed. The two floating legs cancel. The reverse also works: a fixed-rate borrower can swap to floating if it expects rates to fall.
When and why
US bank lending since the 1990s, especially regional banks offering swap loans on commercial property.
How we know
Bank and ISDA documents, and hedge-accounting rules (ASC 815) that let companies treat the loan and swap as a pair.
Debates and risks
A swap fixes the rate but not the exit cost; whether it beats a plain fixed loan depends on rates when the owner sells or refinances.
▸Interest-rate swaps: trading floating payments for fixed are the largest type of Options and other derivativesFact, law or data
The connection
A derivative is a contract whose value comes from something else, here an interest rate. Swaps are private, over-the-counter contracts rather than exchange-listed options, and interest-rate contracts make up about four-fifths of the roughly $850 trillion notional value of OTC derivatives (BIS, 2025).
When and why
A global market centered in London and New York; dealers include JPMorgan, Goldman Sachs, Citi and large European banks.
How we know
BIS semiannual OTC derivatives statistics and swap data repository reports required by Dodd–Frank and EU rules.
Debates and risks
Notional value hugely overstates risk; market value is a small fraction, and net exposure after collateral smaller still, but hard to pin down.
▸Interest-rate swaps: trading floating payments for fixed now mostly reference SOFR: the benchmark rate that replaced LIBORFact, law or data
The connection
Swaps used to pay floating LIBOR. After the LIBOR scandal, dealers moved new swaps to SOFR, and ISDA's fallback protocol converted old ones to SOFR plus a fixed adjustment, about 0.11 points for one-month LIBOR. Today nearly all US dollar swaps reference SOFR.
When and why
ISDA fallbacks took effect January 2021; interdealer trading switched to SOFR in July 2021 ('SOFR First'); LIBOR ended June 30, 2023.
How we know
ISDA's 2020 IBOR Fallbacks Protocol, the CFTC-backed 'SOFR First' initiative, and CME and LCH clearing volumes.
Debates and risks
Loans often use Term SOFR while most swaps use compounded SOFR; mismatches can leave small gaps in a borrower's hedge.
▸Interest-rate swaps: trading floating payments for fixed are regulated, since Dodd–Frank, by Commodity Futures Trading Commission (CFTC)Fact, law or data
The connection
Before 2010, swaps were largely unregulated. Dodd–Frank's Title VII put them under the CFTC: dealers must register, standard swaps between financial firms must be cleared and reported, and dealers must tell clients a swap's mid-market value. Business borrowers hedging a loan can use the end-user exception to skip clearing.
When and why
Dodd–Frank was signed in July 2010; dealer registration began at the end of 2012 and clearing mandates phased in from 2013.
How we know
CFTC rules (17 CFR Part 23 for dealers, Part 50 for clearing) and swap data repositories' public reports.
Debates and risks
Whether the rules made the market safer or concentrated risk in a few clearinghouses that are now 'too big to fail' is debated.
▸ISDA Master Agreement: the standard swap contract governs most Interest-rate swaps: trading floating payments for fixedFact, law or data
The connection
Almost every privately negotiated interest-rate swap, between dealers or between a bank and a property owner, sits under an ISDA Master Agreement, with each trade added by a short confirmation. Cleared swaps follow clearinghouse rules but use ISDA's rate definitions, including fallbacks that moved trades from LIBOR to SOFR.
When and why
Worldwide since ISDA's first standard form in 1987; its 2020 IBOR Fallbacks Protocol moved most legacy dollar swaps to SOFR terms by mid-2023.
How we know
ISDA's published agreements and definitions, and public adherence lists for its protocols with thousands of signers.
Debates and risks
Whether standardization concentrates risk, since nearly everyone uses the same contract and the same few dealers, is debated.
▸Swap loans: a floating bank loan fixed with an interest-rate swap pair a floating loan with Interest-rate swaps: trading floating payments for fixedFact, law or data
The connection
The swap is a separate contract with the bank or its affiliate, sized to the loan: same notional, same payment dates, often amortizing with it. The bank usually offsets it with a back-to-back swap in the dealer market, so it carries the borrower's credit risk but not the rate risk.
When and why
Regional and larger community banks in the US, documented under the ISDA Master Agreement with a schedule and confirmation.
How we know
ISDA Master Agreements and trade confirmations; banks' annual reports describe offsetting customer swaps.
Debates and risks
If the loan is paid off, modified or extended, the swap does not change automatically, and mismatches can cost the borrower.
▸OTC derivatives: about $850 trillion notional (2025) are dominated by Interest-rate swaps: trading floating payments for fixedFact, law or data
The connection
Of about $846 trillion in OTC notional value, roughly $666 trillion, nearly four-fifths, is interest-rate contracts, mostly swaps. Banks, companies, governments and property borrowers use them to turn floating rates into fixed, or the reverse. Every floating-rate CRE loan hedged with a swap adds to this total.
When and why
Worldwide, centered on London and New York dealers; BIS data for end-June 2025.
How we know
BIS semiannual OTC derivatives statistics and ISDA's analysis of the same data.
Debates and risks
Notional overstates risk; the money truly at stake after netting and collateral is far smaller and hard to pin down.