Dealing With Municipal Swap Risks
Author: Alexander B. Buchanan.
Source: Volume 26, Number 03, Fall 2005 , pp.35-43(9)
Abstract:Derivatives are no longer the province for only the sophisticated Fortune 500 Companies. The International Swaps And Derivatives Association estimates that the collective amount of interest rate swaps grew from $2.3 trillion in 1990 to in excess of $142 trillion in 2003, and increasingly, derivatives are finding their way back into the municipal marketplace. This article provides an overview of how interest rate swaps are being used in the municipal marketplace, identifies the risks associated with their use and how municipal borrowers can guard against potential problems, and recommends a legislative solution to the most commonly encountered risk posed by such swaps—the requirement in the municipal context for insurance protection against loss on early termination.
Affiliations: 1: Waller Lansden Dortch & Davis, PLLC.