CHAPTER 4Swaps in Structured Funding

Chance fights ever on the side of the prudent.

– Euripides

Swaps are essential components of almost all securitisation and covered bond structures, though they play their role very much behind the scenes. In this chapter we explain the different purposes and functions that swaps have in structured funding deals and the different types of risk this brings home to the swap provider.


Securitisation swaps are a more complex version of ‘vanilla’ swaps, which are traded in huge volume daily across the globe. Before proceeding to explain the more complex instruments, in this section we present the foundational aspects of plain vanilla swaps for readers from a non‐derivatives background. Readers with a derivatives background may wish to skip this section.

Interest Rate Swaps

An interest rate swap is an agreement where one counterparty agrees to pay a specified interest rate on a notional principal schedule at regular intervals. In return that party will receive another, different specified rate of interest on the same principal schedule at regular intervals. It is possible for the payment intervals to be different between the parties.

The swap is said to consist of two legs. From one counterparty's perspective there is a pay leg and a receive leg. The interest rates applicable can be fixed rate or floating rate. Fixed‐rate legs have a pre‐defined interest rate, which may be constant or might change through the life ...

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