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Sweep Accounts

A sweep account is the exchange of a debt obligation with a fixed interest rate for a liability with a floating rate. The parties participating in the sweep do not exchange denominations, the transaction is based on interest payments.

Sweep account terms:

  • payments are made in one currency;
  • the parties exchange payments within the previously agreed term;
  • the period of the swap usually ranges from 2 to 15 years.

Obligations of one party to the sweep (payer) – to pay amounts calculated on the basis of a fixed interest rate of the par value, which is fixed in the agreement. The other party (beneficiary) – amounts at a floating rate of this nominal. Often, the LIBOR rate is used as a floating rate, and the trading itself takes place on the OTC market and has the status of one of the most common instruments in the world financial market.

Types of sweep accounts are:

  • exchange of payments at a fixed rate for payments at a floating rate (fixed-for-floating);
  • exchange of payments based on fixed rates (fixed-for-fixed);
  • exchange of payments on the basis of floating rates (floating-for-floating).

The desire to resort to a sweep account arises in cases when, for example, one of the parties that issued a fixed rate interest expects a significant decrease in interest rates in the future. As a result of this exchange for floating interest, the party gets rid of some of its financial burden of debt servicing.

Holders of the floating rate obligation also have their own reasons for resorting to this transaction. For example, the company’s management anticipates an increase in interest rates, and in order to avoid an increase in its debt service payments, an exchange of floating interest for a fixed one is arranged. Thus, the sweep account allows financial players to hedge against future changes in interest rates. In addition, such an exchange helps to issue debt at a lower rate.