Interest Rate Swaps

Definition

A contract in which two parties exchange interest payments on a notional amount, most often fixed-rate payments for floating-rate payments, used to hedge or take on interest-rate exposure. Federal law lists interest rate swaps among the contracts that are swaps under the Commodity Exchange Act^[1]; swaps the CFTC designates must be cleared through a registered clearinghouse, except where one party is not a financial entity and is using the swap to hedge or mitigate commercial risk^[2].

Federal law

1. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, § 721, 124 Stat. 1658 (Commodity Exchange Act § 1a(47), 7 U.S.C. § 1a(47)). Defined 'swap' in the Commodity Exchange Act, expressly including interest rate swaps (7 U.S.C. § 1a(47)). Official text: govinfo.gov, U.S. Government Publishing Office.
2. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, § 723, 124 Stat. 1675 (Commodity Exchange Act § 2(h), 7 U.S.C. § 2(h)). Created the swap clearing requirement and the end-user exception for non-financial entities hedging commercial risk (7 U.S.C. § 2(h)). Official text: govinfo.gov, U.S. Government Publishing Office.