Interest Rate Swap (IRS)

• Profit or loss from interest rate transactions is affected by interest rate fluctuations
• Losses may be incurred due to the fact that clients find themselves in a disadvantageous position during individual reference periods – i.e. swap payments made by them exceed payments made by the bank
  - In this case, clients pay a difference of the two payments to the bank
  - For clients, this loss represents hedging cost, provided the transaction was used as hedging
  - Hedging protects clients from significant interest rate fluctuations that could result in substantial financial problems
• Beware of consequences of negative interest rates. Under normal circumstances, the hedger pays fixed and receives floating interest rate payments from the bank. In case of negative market interest rates, the fixed rate payer will have to pay both the fixed (positive) and the floating (negative) rates to the Bank.
  
  

Risk warnings 

This document does not represent an investment recommendation under Regulation (EU) No. 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse. Moreover, nor does it represent investment advice pursuant to Act No. 256/2004 Coll., on Capital market undertakings, as amended. The information specified herein shall not be considered an offer to purchase or sell any investment instrument or any other solicitation or invitation regarding the purchase or sale thereof. 

By law, Komerční banka, a. s. may not provide legal or tax advice. Before investing, clients should carry out their own risk analysis in terms of legal, tax, and accounting consequences, without relying solely on the information included in this document and, if necessary, consult tax or other advisors. 

Komerční banka, a. s. assumes no liability for damage incurred as a result of the use of this document or any information contained herein in excess of any liability foreseen by the applicable legislation. Each investor shall adopt their own informed decision regarding the investment suitability, as the investment instrument specified herein may not be suitable for all investors. 

Past performance of investment instruments is not necessarily indicative of future performance. Expected future performance depends on premises that may not materialise. Investment instruments and other investments are associated with different investment risks, whereas investments may fluctuate in value and even the initially invested amount may not be fully recovered. Furthermore, investment instruments denominated in other foreign currencies are also exposed to risks arising from changes in foreign exchange rates, with potential positive or negative impact on investment instrument prices and consequently the investment returns. 

Employees of Komerční banka, a.s. and of other companies of the same financial group, including their close persons and authors of this document, may – from time to time – trade in or hold the investment instruments described herein or derivatives derived therefrom. This document shall not be binding on Komerční banka, a.s. or other companies of the same financial group in connection with the provision of their investment services to their clients. 

This document has been issued by Komerční banka, a. s. – i.e. a bank and an investment firm within the meaning of the applicable legislation. As such, it is subject to supervision by the Czech National Bank. 

This site containing investment products and insurance-based investment products is not intended for citizens or residents of the United States of America (USA) or for any “U.S. Person”, as defined in SEC Regulation S under the U.S. Securities Act of 1933. The investment products and insurance-based investment products described on this website are not registered under the U.S. federal securities laws or any other relevant U.S. state laws. Consequently, no investment products or insurance-based investment products may be offered or sold directly or indirectly in the USA, to or for the benefit of residents and citizens of the USA and/or U.S. Persons. This restriction also applies to residents and citizens of the USA and U.S. Persons who may access this website while outside of the USA.

• Interest Rate Swap (IRS) is an agreement to exchange cash flows denominated in one currency and derived from a fixed or floating interest rate base
• Party A undertakes to pay fixed interest to Party B, while Party B undertakes to pay agreed floating interest to Party A
• Interest payments are derived from agreed principal, agreed interest rate, for the agreed period and as of the agreed maturity dates
• Original creditor relationships of involved parties are not modified from a legal perspective – parties to a swap transaction remain fully liable for their original interest liabilities (i.e. remain creditors in terms of interest receivable) covered by such swap
• Floating interest rate is fixed – and compared to a fixed interest rate - two business days prior to the start of each interest period
• At the end of each interest period, settlement is made by means of a single payment
• The party with higher swap interest payment due makes the payment – amounting to the difference of parties’ mutually exchanged interest payments
• There are several IRS modifications available, such as:
  - Amortised IRS – nominal amount from which interest is calculated is reduced over the course of the contract term in a predefined manner
  - Step up IRS – nominal amount from which interest is calculated is increased over the course of the contract term in a predefined manner
   

• Consult the Markets in Financial Instruments Directive
• Receive current information about financial market developments

• Counterparties may agree on swap cancellation in the course of the contract term
• When interest rate swap is cancelled, its market value is settled by means of a one-off payment, with the transaction and all future liabilities being cancelled - interest payments made prior to swap cancellation are not refunded
• As of the IRS cancellation date, counterparties agree on a price, at which they are both willing to withdraw from the transaction
• Party in a disadvantageous position (loss incurred) pays the agreed amount to the other party (swap market price), at spot value date, thereby cancelling the swap transaction
• Any accrued interest payments outstanding as of the swap cancellation date are included in the swap market price

It is intended for individuals and legal entities - domiciled in the Czech Republic and abroad.