A swap dealer is a licensed investment broker who buys and sells credit default swaps, also known as collateralized debt obligations (CDOs) (CDSs). The party who purchases a CDS insures a debt instrument owned the CDS issuer in exchange for regular premium payments, similar to how insurance products work. Swap dealers work for brokerage firms or investment firms, and they can represent either the issuer or the CDS purchaser in negotiations.
Brokers can trade swaps in many countries in the same way they can trade other types of securities like stocks and bonds, though swap transactions are frequently private, meaning they take place outside of stock exchanges. Individuals who negotiate these trades, on the other hand, must be licensed to sell securities. A person must attend a series of training classes administered representatives of the regional or national securities regulatory authority in order to become a licensed broker. Attendees must pass an exam at the conclusion of the training session in order to apply for a license. While a college degree is not required for a swap dealer, many firms prefer to hire swap dealers with degrees in finance, economics, or a related field.
The money raised from selling swaps is used CDS issuers to fund lending and other investment opportunities. As a result, a swap dealer working for a firm that issues swaps must aggressively market these instruments to investors. By demonstrating to potential investors that the assets being insured are low-risk securities, the dealer tries to negotiate the lowest possible premium. If the CDS buyer never has to make a payment, the issuer’s premium payments are pure profit for the buyer. Most purchase agreements include a clause allowing the buyer to increase the premium charge at a later date, and the broker is in charge of negotiating the best deal possible.
Swaps issued various types of businesses are purchased many large investment firms and venture capitalist firms. These companies hire dealers who try to negotiate high premiums in order to maximize the buyer’s potential profits. Premium prices are determined risk levels, with the riskiest swaps requiring the highest premium payments. A swap dealer must balance the risks of pursuing the most profitable premium payments with the need to protect the purchaser from excessive risk.
A swap dealer, like most investment brokers, is usually paid on commission. The commissions paid to dealers who represent swap purchasers are frequently linked to the premium payments on the swap. Dealers who represent swap issuers are typically compensated based on the amount of coverage the swap buyer is willing to provide. In other cases, brokers are paid commissions based on the number of trades they execute in a given time period.