Thrift Oil Co. v. Bank of America
United States Court of Appeals for the Ninth Circuit
322 F.3d 1039 (2002)
- Written by Brett Stavin, JD
Facts
Swaps are financial instruments that are common in the derivatives market. The most common swap relates to interest rates, but swap agreements can be tied to a variety of indexes, including currency rates or the prices of securities or commodities. In the typical interest-rate swap, the parties will agree on the hypothetical principal amount, known as the notional amount. The notional amount never changes hands. The purpose of the notional amount is to serve as a baseline for measuring the parties’ swap obligations. One party will make payments to its counterparty calculated by reference to a fixed interest rate applied to the notional amount. The other party will make payments to its counterparty based on a floating interest rate, such as the London Interbank Offered Rate (LIBOR). The payments are netted against each other so that payments flow only to one party, depending on the floating rate. For example, if the floating rate of interest is above the fixed rate, the party making floating payments will pay the difference. If the fixed rate is above the floating rate, the party paying the fixed rate will pay the difference. The party who receives payments under the swap is considered in the money, whereas the party making payments is considered out of the money. The swap will continue for an agreed-on period of time. The terms are documents in a confirmation and a master agreement, often based off of a form agreement prepared by the International Swaps and Derivatives Association (ISDA). Swaps are an important financial tool that allow market participants to hedge against interest-rate fluctuations or obtain other financing advantages.
Rule of Law
Issue
Holding and Reasoning (Hall, J.)
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