The problem of locating potential counter parties was solved through dealers and brokers.
A swap dealer takes on one side of the transaction as counterparty. Dealers work for investment, commercial or merchant banks. "By positioning the swap", dealers earn bid-ask spread for the service. In other words, the swap dealer earns the difference between the amount received from a party and the amount paid to the other party.
In an ideal situation, the dealer would offset his risks by matching one step with another to streamline his payments. If the dealer is a counterparty paying fixed rate payments and receiving floating rate payments, he would prefer to be a counterparty receiving fixed payments and paying floating rate payments in another swap.
A perfectly netted position as just described is not necessary. Dealers have the flexibility to cover their exposure by matching multiple parties and by using other tools such as futures to cover an exposed position until the book is complete.
Swap brokers, unlike a dealer do not take on a swap position themselves but simply locate counter parties with matching needs. Therefore, brokers are free of any risks involved with the transactions. After the counter parties are located, the brokers negotiate on behalf of the counter parties to keep the anonymity of the parties involved.
By doing so, if the swap transaction falls through, counter parties are free of any risks associated with releasing their financial information. Brokers receive commissions for their services.
A swap dealer takes on one side of the transaction as counterparty. Dealers work for investment, commercial or merchant banks. "By positioning the swap", dealers earn bid-ask spread for the service. In other words, the swap dealer earns the difference between the amount received from a party and the amount paid to the other party.
In an ideal situation, the dealer would offset his risks by matching one step with another to streamline his payments. If the dealer is a counterparty paying fixed rate payments and receiving floating rate payments, he would prefer to be a counterparty receiving fixed payments and paying floating rate payments in another swap.
A perfectly netted position as just described is not necessary. Dealers have the flexibility to cover their exposure by matching multiple parties and by using other tools such as futures to cover an exposed position until the book is complete.
Swap brokers, unlike a dealer do not take on a swap position themselves but simply locate counter parties with matching needs. Therefore, brokers are free of any risks involved with the transactions. After the counter parties are located, the brokers negotiate on behalf of the counter parties to keep the anonymity of the parties involved.
By doing so, if the swap transaction falls through, counter parties are free of any risks associated with releasing their financial information. Brokers receive commissions for their services.