UK Treasury Cracks Down on Interest Rate Swap Scandal

The Financial Secretary to the Treasury in the UK told the Financial Services Authority this week that banks must allow businesses that could have been mis-sold interest rate swaps to cease making premium payments. While stopping short of a moratorium on payments, the secretary reportedly privately told the FSA that more than 90% of hedging products were mis-sold.

These misunderstandings surrounding the interest rate swap market are causing headaches for financial regulators concerned with systemic risk. With similar problems in the U.S., some investors are concerned that these actions could become particularly troublesome in the future, if interest rates rapidly rise or change, causing quick losses for one counterparty.