A type of swap under which one party, typically called the fixed rate payer, pays a fee (usually quarterly) to the other party, usually called the floating rate payer, which pays to the fixed rate payer a variable amount that is usually the bed on the product of SOFR or another benchmark rate and the transaction's notional amount. The fixed rate is typically the product of a fixed number of basis points and the swap's notional amount.

The payments are made by both parties on the same payment date each period and are netted so that only one party makes payment to its counterparty. Parties use interest rate swaps (IRS) to lock in periodic interest-payment amounts in circumstances where they need to fix cash outflow (see Practice Note, Derivatives: Commercial Uses: Managing Interest Rate Risk: Interest Rate Swaps).

Note that many common types of IRS must be cleared and exchange traded under CFTC rules (see Legal Updates, Final Clearing Determination for CDS and Interest Rate Swaps Issued by CFTC and MAT Summary: CFTC Swap Exchange-Trading Mandates and Effective Dates).

For further detail on IRS, see Practice Note, Finance Fundamentals: Deconstructing Derivatives: Basic (Plain Vanilla) Interest Rate Swap.