Interest Rate Swaps: How Fixed-for-Floating Trades Anchor the $846 Trillion OTC Derivatives Market

What is an interest rate swap (IRS) and how does it work?

An interest rate swap is an agreement in which two counterparties exchange fixed-rate and floating-rate coupon payments on the same notional amountCITE:E2. The U.S. Commodity Futures Trading Commission (CFTC) defines an IRS as an agreement between two counterparties in which one party makes periodic payments to the other based on an interest rate — either fixed or floating — multiplied by a notional amount, in exchange for receiving periodic payments based on a "reference rate" (generally an interest rate or rate index) multiplied by the same notional amount in most casesCITE:E1. Because both legs of the trade are calculated off the same notional principal, that principal itself never changes hands — it exists only to size the interest payments each side owesCITE:E1.

How do companies use IRS to manage interest rate risk?

US corporates identify interest rate swaps as their favorite derivative contract for managing interest rate riskCITE:E3. The Board of Governors of the Federal Reserve System reports that in surveys of derivative usage, a sizable fraction of larger US firms typically indicate they use interest rate swaps, and that swaps rank as their preferred instrument for this purposeCITE:E3. This preference sits alongside the swap mechanics described above: a firm holding floating-rate debt can use an IRS to receive floating payments and pay fixed, converting its exposure to a predictable fixed-rate cost without altering the underlying loanCITE:E2CITE:E3.

How large and active is the interest rate swap market within OTC derivatives?

Interest rate derivatives make up 79% of all outstanding OTC derivatives notional amounts, according to the Bank for International Settlements (BIS)CITE:E5. BIS data show the notional value of outstanding OTC derivatives overall rose to $846 trillion as of June 2025, up 16% from June 2024CITE:E4. BIS attributes this growth to interest rate derivatives specifically, noting their 15% growth rate drove the total increase given their 79% share of the marketCITE:E5. On trading activity, BIS reports that turnover of OTC interest rate derivatives averaged $7.9 trillion per day in April 2025CITE:E6.

This represents what: interest rate swaps' definition as a fixed-for-floating exchange on a shared notional principalCITE:E1CITE:E2 lines up with why US corporates name them their top hedging toolCITE:E3 — and that corporate demand sits within a market where interest rate derivatives already account for 79% of $846 trillion in outstanding OTC notionalCITE:E4CITE:E5 and trade at $7.9 trillion per dayCITE:E6.