(and the market) were suggesting, he or she may wish to enter into an arrears swap as opposed to a conventional swap.   Basis Swap In a conventional swap one leg comprises fixed-rate payments and the other floating-rate payments. In a basis swap both legs are floating-rate, but linked to different money market indices. One leg is normally linked to Libor, while the other might be linked to the CD rate or the commercial paper rate. This type of swap would be used by a bank in the United States that had made loans that paid at the prime rate and funded its loans at Libor. A basis swap would eliminate the basis risk between the banks income and interest expense. Other basis swaps are traded in which both legs are linked to Libor, but at different maturities; for instance one leg might be at three-month Libor and the other at six-month Libor. In such a swap, the basis is different as is the payment frequency: one leg pays out semiannually while the other would be paying on a quarterly basis.   Margin Swap It is common to encounter swaps where there is a margin above or below Libor on the floating leg, as opposed to a floating leg of Libor flat. Such swaps are called margin swaps. If a banks borrowing is financed at Libor+25bps, it may wish to receive Libor+25bps in the swap so that its cash flows match exactly. The fixed-rate quote for a swap must be adjusted correspondingly to allow for the margin on the floating side. So in our example if the fixed-rate quote is say, 6.00%, it would be adjusted to around 6.25%; differences in the margin quoted on the fixed leg might arise if the day-count convention or payment frequency were to differ     between fixed and floating legs. Another reason why there may be a mar- gin is if the credit quality of the counterparty demanded it, so that highly rated counterparties may pay slightly below Libor, for instance.   Off-Market Swap When a swap is transacted, its fixed rate is quoted at the current market rate for that maturity. When the fixed rate is different from the market rate, this type of swap is an off-market swap, and a compensating pay- ment is made by one party to the other. An off-market rate may be used for particular hedging requirements for example, or when a bond issuer wishes to use the swap to hedge the bond as well as to cover the bonds issue costs.   Differential Swap