Swap counterparty
Asset-Backed Securities glossary · Asset Backed Securities
Definition
A party that exchanges cash flows with the trust (fixed-floating, basis, or currency) to hedge structural risks; subject to rating triggers.
Swap counterparty in plain English
The "trust" is the legal box that holds the pool of loans and pays the bondholders, but its incoming cash can be mismatched with what it owes — maybe the loans pay a floating rate that moves around while the bonds owe a fixed rate, or the money comes in one currency and goes out in another. A swap counterparty is an outside party (usually a big bank) that agrees to trade cash flows with the trust to smooth out that mismatch, like a friend who agrees to swap your unpredictable tip-based income for a steady weekly allowance so your bills are always covered. The catch is you're now depending on that friend to stay solvent, so "rating triggers" are built in: if the counterparty's credit rating slips too low, it must post collateral or be replaced. That protects the deal from swapping one risk for a new one.
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