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e. Need for Strong Credit
With the evolution of the interest rate swaps market,
intermediaries could during the relevant years do far more deals
if they were willing to offer themselves as counterparties.
Major commercial banks, as compared to investment banks, were
more highly capitalized and were more willing to assume the
credit risks inherent in acting as a counterparty. The
importance of credit risk was a factor during the relevant years
in the dominance of commercial banks as dealers; e.g., 16 of the
world’s 20 largest swaps dealers in 1993 were commercial banks.
A dealer with a weak credit rating in the swaps market was hurt
in its ability to enter into swaps.
3. Brokers
Swap brokers do not take a position or act as a principal in
a swap transaction, and they do not maintain any exposure with
respect to a swap. Swap brokers simply arrange for dealers to
enter into interdealer swaps by matching dealers who want to
effect a particular swap with other dealers who want to effect a
similar swap. The clientele of a swap broker is limited to
dealers; e.g., an end user may not use the services of a broker
unless the end user is a recognized dealer in the interbank
market. A swap broker is paid a standard fee for its services
based on a percentage of the notional principal amount.
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