Hello,I wonder what is the funding cost of a interest rate derivative and on which factors does it depend.When a bank issues an IRS to a counterparty why and when does it need funding? Along the life of the IRS why and when does it need funding?Thank you,

It has to do with collateralization. If the two swap counterparties have signed 2-way CSA (credit support annex) support along with their master ISDA agreements, there will be collateral movements between the parties based on the market value of the swap. Say we're dealing with a vanilla fixed for floating IRS where counterparty party A pays fixed and receives floating. If rates increase after origination then the swap will have a positive mark for A (and hence an equal magnitude negative mark to counterparty B). With a 2-way CSA agreement counterparty B will then have to send collateral to party A (the exact amount of the collateral movement will depend on the mark of the swap and the specific terms of the CSA - threshold, minimum transfer amount, etc.) and party B will have to fund the collateral somehow.

QuoteOriginally posted by: DavidJNIt has to do with collateralization. If the two swap counterparties have signed 2-way CSA (credit support annex) support along with their master ISDA agreements, there will be collateral movements between the parties based on the market value of the swap. Say we're dealing with a vanilla fixed for floating IRS where counterparty party A pays fixed and receives floating. If rates increase after origination then the swap will have a positive mark for A (and hence an equal magnitude negative mark to counterparty B). With a 2-way CSA agreement counterparty B will then have to send collateral to party A (the exact amount of the collateral movement will depend on the mark of the swap and the specific terms of the CSA - threshold, minimum transfer amount, etc.) and party B will have to fund the collateral somehow.OK. I understand. Thanks very much for your reply.In the case of non collateralized instruments do you know how the funding costs arise?Thank you

Not quite sure if you mean that; actually there are also several charges that banks claim in these days when quoting swaps, but those are again related to upcoming collateral posts (especially when coming to "one-sided" CSAs with AAA CP). In a theory world without any collateral posting etc, i cant see why you should have funding costs for a fair swap.