Swap Market
Most swaps are traded over-the-counter (OTC), "tailor-made" for the counterparties. Some types of swaps are also exchanged on futures markets such as the Chicago Mercantile Exchange Holdings Inc., the largest U.S. futures market, the Chicago Board Options Exchange, IntercontinentalExchange and Frankfurt-based Eurex AG.
The Bank for International Settlements (BIS) publishes statistics on the notional amounts outstanding in the OTC derivatives market. At the end of 2006, this was USD 415.2 trillion, more than 8.5 times the 2006 gross world product. However, since the cash flow generated by a swap is equal to an interest rate times that notional amount, the cash flow generated from swaps is a substantial fraction of but much less than the gross world product—which is also a cash-flow measure. The majority of this (USD 292.0 trillion) was due to interest rate swaps. These split by currency as:
| Notional outstanding |
|||||||
| Currency | End 2000 | End 2001 | End 2002 | End 2003 | End 2004 | End 2005 | End 2006 |
| Euro | 16.6 | 20.9 | 31.5 | 44.7 | 59.3 | 81.4 | 112.1 |
| US dollar | 13.0 | 18.9 | 23.7 | 33.4 | 44.8 | 74.4 | 97.6 |
| Japanese yen | 11.1 | 10.1 | 12.8 | 17.4 | 21.5 | 25.6 | 38.0 |
| Pound sterling | 4.0 | 5.0 | 6.2 | 7.9 | 11.6 | 15.1 | 22.3 |
| Swiss franc | 1.1 | 1.2 | 1.5 | 2.0 | 2.7 | 3.3 | 3.5 |
| Total | 48.8 | 58.9 | 79.2 | 111.2 | 147.4 | 212.0 | 292.0 |
Usually, at least one of the legs has a rate that is variable. It can depend on a reference rate, the total return of a swap, an economic statistic, etc. The most important criterion is that it comes from an independent third party, to avoid any conflict of interest. For instance, LIBOR is published by the British Bankers Association, an independent trade body.
Read more about this topic: Swap (finance)
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