I have been involved recently on a case where a client’s bank is proposing a SWAP deal on the back of an existing SWAP deal which does something quite clever. It writes a fresh contract in a way that negates the original fixed rate (it is a bit like an equation where the old rate becomes the ‘common denominator’ and therefore neutralised) and basically creates a fresh fixed rate at a lower level. Clearly there needs to be a reduction in costs in this for the borrower to want to sign up for it and therefore there is merit in it.
What it is doing however is creating a fresh contract for the bank and there is income for them from the buying and selling spread in the rates. So the bank get something out of it also.
In any ‘secondary’ /limited market in the financial world the issue of ‘churn’ is a common feature – perhaps it has got to that point in the SWAP market?
There is an opportunity here for some clients – who may want to retain their existing SWAP structure but reduce the rate. Perhaps also there is a mechanism here for avoiding breaking a deal when that become necessary?
It does however increase the potential reputational risk from such deals (i.e. accusations of mis-selling) as if you think a straightforward SWAP deal is complex you should see these! Both lenders and borrowers therefore need to exercise care.