An Interest Rate Swap or Interest Rate Hedging Product (IRHP) is a type of financial derivate used to manage the fluctuations in interest rates.
Banks have attempted to sell Interest Rate Hedging Products as ‘protection’ against rising interest rates. These products are financially speculative and overly complex, and were often a requirement or condition for the Bank agreeing to provide a separate loan facility.
Interest Rate Hedging Products are complex and were typically marketed with the expectation that interest rates would rise. However, if interest rates dropped, businesses were required to pay high-interest amounts to their bank.
In most cases, Banks actively incentivised the sale of these products, but the extent of exit fees were not fully disclosed.
Types of Interest Rate Hedging Products
Enables customer to ‘fix’ the interest rate. This type of derivative allows two parties to exchange one line of interest payments for another, over a specified period of time. A fixed interest payment means that the amount remains the same for the entire contract period.
Places limit on any interest rate rises. If the interest rate reaches higher than the agreed rate within a specified period, the buyer will receive a payment at the end of each period.
Enables customer to limit interest rate fluctuations within a simple range. A structured collar involves arrangements where if the reference interest rate falls below the bottom of the range, the interest rate payable may increase above the bottom of the range.
How can we help?
At Seneca Banking, we extend our existing debt advisory expertise to support stakeholders whose businesses have been directly impacted by mis-sold Swaps and other Interest Rate Hedging Products.
These products were widely sold by financial institutions mainly between 2005 and 2010 in conjunction with term loan and overdraft products with the intention to minimise risk to interest rate rises.
If you suspect that you may have been mis-sold an Interest Rate Hedging Product, get in touch for a free no obligation consultation with a member of the Seneca Banking Team.
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