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Among dealers, it is common to refer to the spread reflected
in the pricing of a swap, and the convention is to quote the
fixed rate on the assumption that the floating rate is LIBOR flat
(i.e., with no spread or premium attached to the floating rate).
A swap, however, may be negotiated with the floating payment tied
to an index plus or minus a spread; i.e., a margin.
d. Role in the Market
When the swaps market first began, every swap generally was
facilitated by a dealer. The dealer was not a party to the
transaction but, generally for a fee, arranged the swap by
introducing the counterparties to each other and helping them to
effect the mechanics of the transaction. With the evolution of
the market, dealers became parties to each swap. In the early
years of the market’s evolution, a dealer would effect a swap
transaction by warehousing the swap (i.e., entering into the swap
without having entered into a matching swap but with the
expectation of hedging the entered-into swap either through a
matching swap or a portfolio of swaps or temporarily in the cash,
securities, or futures market) until the dealer could arrange an
offsetting swap with another counterparty (i.e., match a book).
In the later years of the market’s evolution, the dealer would
simply accept a position opposite the counterparty without
expecting to locate another counterparty transaction to match the
first transaction.
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