Swap history

Swap agreements originated in the UK in the 1970s, days when men were men and governments were suspicious of foreign speculators fannying around in their currencies. HMRC, for example, would tax foreign exchange transactions into and out of sterling, constraining capital flight, it was thought, and increasing domestic investment.

Still, there was a whole world out there waiting for British money to chase it. So those financial wizards in the city had an idea. How about, simultaneously, I lend you a million pounds, at fixed sterling interest, and you lend me a million and a half dollars (being the prevailing value of a million sheets in USD), at fixed dollar interest, each of us to repay the other on the same day in 5 years’ time?

Thus, swaps were originally back-to-back loans. Two companies located in different countries would mutually swap loans in the currency of their respective countries. This arrangement allowed each company to have access to the foreign exchange of the other country and avoid paying any foreign currency taxes.

IBM and the World Bank entered into the first formalized swap agreement in 1981. The World Bank needed to borrow German marks and Swiss francs to finance its operations, but the governments of those countries prohibited it from borrowing activities. IBM, on the other hand, had already borrowed large amounts of those currencies, but needed U.S. dollars when interest rates were high for corporate borrowers. Salomon Brothers came up with the idea for the two parties to swap their debts. IBM swapped its borrowed francs and marks for the World Bank’s dollars. IBM further managed its currency exposure with the mark and franc. This swaps market has since grown exponentially to trillions of dollars a year in size.

Read more: When was the first swap agreement and why were swaps created? | Investopedia https://www.investopedia.com/ask/answers/051115/when-was-first-swap-agreement-and-why-were-swaps-created.asp#ixzz5KBXsCvUm

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