Collateral Management

CHAPTER 19OTC Derivatives and Collateral – Transaction Types – Cross-Currency Swaps

This chapter describes the purpose of and characteristics of cross-currency swaps, another type of OTC derivative product. A particular reason for covering this topic is to highlight the specific characteristics of cross-currency swaps, to enable comparison with the similar sounding product foreign exchange swaps (as covered within the previous chapter). Particularly for those readers that are unfamiliar with foreign exchange operations and settlement, it is recommended that the foreign exchange swaps chapter is read prior to reading this chapter, as fundamental concepts of foreign exchange are covered therein.

19.1 DEFINITION

A cross-currency swap (CCS) is an OTC derivative contract in which two parties exchange principal amounts in different currencies at the start of the trade, with the reverse exchange occurring at the close of the trade, and with the exchange of interest payments in different currencies periodically, during a set period of time.

CCS are part of a family of financial products known as currency derivatives.

CCS are also known as ‘foreign currency swaps’, ‘plain vanilla foreign currency swaps’, and ‘back-to-back loans’.

Note: in a cross-currency swap, because the principal amounts are paid in full, the term ‘notional’ (meaning ‘theoretical’) is not applicable, consequently the terms ‘principal’ and ‘principal amount’ are used instead.

19.2 PURPOSE

CCS are used to ...