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iii. Reduce Cost of Funding
End users also use interest rate swaps to reduce the
transaction costs which are a natural consequence of raising
funds. If, for example, a corporation wants to borrow at a fixed
rate but has a shelf registration for commercial paper paying a
floating interest rate, the corporation may be able to minimize
its transaction costs by issuing commercial paper with a floating
rate and then swapping the commercial paper for an obligation
with a fixed rate.
2. Dealers
a. Typical Dealers
Since at least 1992, the swaps market has been almost
entirely intermediated by institutions acting as dealers. Swaps
dealers are generally major financial institutions (e.g.,
securities firms and banks such as FNBC) which hold themselves
out as market-makers; i.e., entities ready and willing to take
either side of a swap transaction for the purpose of earning a
profit by originating new swaps.17 On some occasions, these
institutions enter into swaps in their capacity as swaps dealers.
On other occasions, these institutions enter into swaps in their
capacity as end users to manage the overall structure of their
portfolios to minimize the net exposure to interest rate
17 In performing this market-making function, dealers act
more as principals than as agents in transactions.
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