Bridge over ocean
27 February 2018 Financial Analysts Journal

The Birth of the Swap

  1. Raphael Hodgson

In the 1970s, the dark ages of regulatory excess, globalization was impeded by tough restrictions imposed by governments on outflows from their capital markets. U.S. and U.K. companies got around some of these restrictions by devising parallel loan agreements whereby U.S. companies funded subsidiaries of U.K. companies in the United States and U.K. companies funded subsidiaries of U.S. companies in the United Kingdom. Thus, cross-border transfers were avoided. But these arrangements were complex and subject to legal haggling. In 1976, the swap emerged as a much simpler solution to the problem, and its popularity has grown ever since as more and more uses have been found for this predominant derivative.

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