What is a Termination Date
A termination date is the day on which a financial contract, most notably a swap, ends, a final payment is made and no further exchanges will occur.
The termination date is also referred to as the "expiration date."
BREAKING DOWN Termination Date
Unlike futures contracts, swaps are not standardized, allowing for more customized terms. While traded futures are settled on the third Friday of the expiration month, a swap may be terminated on any date on which the parties agree.
Swaps are contracts that exchange assets, liabilities, currencies, securities, equity participations or commodities. Some are simple, such as floating-for-fixed-rate loans or Japanese yen for British pound sterling, while others are quite complex incorporating multiple currencies, interest rates, commodities and options. Both types are flexible in terms of specifications such as pricing or evaluation benchmarks, timing or contractual horizons, settlement procedures, resets, and other variables.
Terminating a Swap Contract
The easiest way to terminate the contract is to hold it to maturity. In this way, when the termination date arrives, the swap contract automatically ends. However, if one or both parties in a swap contract wish to terminate, there are several methods:
1 - Enter into an offsetting swap. The problem is finding a willing counterparty to take the other side at similar terms. It also introduces additional counterparty risk as there will be two swaps in effect.
2 - For cash settled swaps, one party could pay off the swap at market value, assuming this is written into the swap agreement.
3 - Sell the swap to another party. However, this will require permission from the counterparty.
4 - Use a swaption, or swap option, to offset the original swap.
Another way that a swap terminates is through default by one of the counterparties. The swap's master agreement should outline the remedies available to the harmed counterparty, with methods to calculate payments.
Because swaps are completely customizable between the two counterparties, the master agreement may also include termination events that could trigger the ending of the contract. These could be declines in capital or collateral levels, changes in business status, sales of assets, outside events, financial conditions, legal changes or almost anything else.
Other Uses for Termination Date
A termination date is also found in other areas, aside from traded financial contracts. For example, a termination date could be the final date of employment in a company. Or, it could be the end of a real estate leaser or a mortgage.
See Swap Markets and Contracts for more.