Interest Rate Swaps can be an effective tool in managing asset/liability mismatches present in many of our member’s balance sheets. Mismatches occur when a member funds long-term assets using short-term liabilities, or vice versa. Interest Rate Swaps involve an exchange of a fixed-rate payment for a floating payment, which is generally tied to the Secured Overnight Financing Rate (SOFR), Prime, or a Treasury index, based on a specified notional amount and an agreed upon day count convention.
Pay Fixed/Receive Floating
Interest Rate Swap
Liability-sensitive members may lock in spread and guard against a rise in rates by utilizing a “Pay Fixed/Receive Floating” Interest Rate Swap, where the floating rate received would increase in a rising rate environment, offsetting the associated increase in a member’s cost of funds relating to their short-term or floating-rate liabilities. Asset-sensitive members are vulnerable in declining rate environments, and conversely may opt to pay floating and receive a fixed payment when executing Interest Rate Swaps.
For example, if a segment of a deposit base demonstrates a high correlation to SOFR, a member may elect to “lock in” the rate of that floating rate deposit category for a period of time by engaging in a Pay Fixed/Receive Floating Interest Rate Swap (see the diagram above for an example). This would effectively transform the floating rate liability to a fixed rate equal to the term of the Interest Rate Swap. You can potentially receive favorable “hedge” accounting treatment provided that certain criteria are met at the inception and throughout the life of the Interest Rate Swap. Please consult with your accountant as a first step in deciding whether Interest Rate Swaps are appropriate for your institution.
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Please consult with your accountant regarding the accounting treatment and ongoing requirements associated with an Interest Rate Swap transaction. For more information on how FHLBNY Interest Rate Swaps are issued and how this product can be used to help meet your institution’s needs, contact a Relationship Manager at (212) 441-6700.