What is a 'Hara-Kiri Swap'

A hara-kiri swap is an interest rate or cross-currency swap devoid of profit potential for the originator. The term became popular in the 1980s when Japanese banks and brokers were offerings very attractive rates in order to obtain business from mostly foreign companies. In Japan, hara-kiri is a form of slow ritual suicide. The swaps were dubbed hara-kiri because not making a profit on these types of transactions was viewed as financial suicide. 

Breaking Down the 'Hara-Kiri Swap'

Hara-kiri swaps provide no intrinsic benefits to the parties that offer them, but there are extrinsic benefits to consider. Offering an attractive swap to a large company may induce them to deal with your bank. This could open up opportunities to profit elsewhere, including underwriting new issues, loans, banking fees, insurance policies, and the list goes on. The danger to the offering party is that savvy investors will take advantage of the hara-kiri swap without providing profitable business elsewhere. 

How Hara-Kiri Swaps Work

Hara-kiri swaps work like other currency or interest rate swaps. The difference is that with a hara-kiri swap, the rate offered by the originator is more attractive than what is available in the marketplace. For example, the swap originator may offer higher interest payments to the other party than what other banks are offering, or they may offer a more attractive exchange rate on currencies. Such actions reduce the profit margin of the bank, making it less likely they will profit or benefit directly from the transaction. 

Such swaps are traded over the counter (OTC), and in this case often directly marketed by a bank or brokerage to potential clients. With OTC transactions the parties can negotiate the terms they want from the swap. In this way, the originator could set maximum and minimum rates they will pay/receive, essentially guaranteeing the other party will come out even (worst case) or ahead (best case) on the swap. With fluctuating exchange rates and interest rates, and potentially huge sums of money involved in these typically institutional transactions, if markets go the wrong way it could mean big losses or missed profit potential for the bank or broker.

Hara-kiri swaps were most popular in Japanese yen related swaps. Their popularity declined as Japanese banks expanded into Europe, and therefore no longer needed to try to entice foreign businesses to do business in Japan. Also, the Japanese stock market started crashing in the early 90s, putting stress on the banks and the economy.

  1. Swap Bank

    A swap bank is an institution that acts as a broker to two unnamed ...
  2. Liability Swap

    A liability swap is a financial derivative in which two parties ...
  3. Foreign Currency Swap

    A foreign currency swap is an agreement to exchange currency ...
  4. Swap Curve

    A swap curve identifies the relationship between swap rates at ...
  5. Reverse Swap

    A reverse swap is an exchange of cash flow streams that undoes ...
  6. Swap

    A swap is a derivative contract through which two parties exchange ...
Related Articles
  1. Managing Wealth

    An In-Depth Look at the Swap Market

    The swap market plays an important role in the global financial marketplace; find out what you need to know about it.
  2. Trading

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  3. Trading

    Currency Swap Basics

    Find out what makes currency swaps unique and slightly more complicated than other types of swaps.
  4. Trading

    Different Types of Swaps

    Identify and explore the most common types of swap contracts. Swaps are derivative instruments that represent an agreement between two parties to exchange a series of cash flows over a specific ...
  5. Trading

    How To Value Interest Rate Swaps

    An interest rate swap is a contractual agreement between two parties agreeing to exchange cash flows of an underlying asset for a fixed period of time.
  6. Investing

    CFTC Probes Banks' Use of Interest Rate Swaps

    U.S. regulators are probing banks' trading and clearing of interest rate swaps, which played a central role in the 2008 financial crisis
  7. Investing

    The Advantages Of Bond Swapping

    This technique can add diversity to your portfolio and lower your taxes. Find out how.
  8. Investing

    The Fast-Paced World of Libor & Fixed Income Arbitrage

    LIBOR is an essential part of implementing the swap spread arbitrage strategy for fixed income arbitrage. Here is a step-by-step explanation of how it works.
  9. Trading

    Introduction To Counterparty Risk

    Unlike a funded loan, the exposure from a credit derivative is complicated. Find out everything you need to know about counterparty risk.
  10. Investing

    A Guide To Real Estate Derivatives

    Real estate derivatives provide exposure to the real estate market without having to own property, by using the performance of a real estate return index.
  1. When was the first swap agreement and why were swaps created?

    Learn about the history of swap agreements, the first swap agreement between IBM and the World Bank, and how swaps have evolved ... Read Answer >>
  2. What Is a 'Gypsy Swap'?

    A gypsy swap allows a company to raise capital without issuing debt or holding a secondary offering. Read Answer >>
  3. How do companies benefit from interest rate swaps?

    Learn how companies can swap interest rate payments and mutually benefit. Find out how these swaps arbitrage differences ... Read Answer >>
  4. What is the difference between the Sarbanes-Oxley Act and the Dodd-Frank Act?

    Learn about the differences between the Sarbanes-Oxley Act and the Dodd-Frank Act, and understand the reasons why each bill ... Read Answer >>
  5. How Do You Use a Back-to-Back Loan?

    Back-to-back loans—or parallel loans—are a financial move used by companies to curb currency risk. Read Answer >>
Trading Center