Overnight Indexed Swaps (OIS)

An OIS is a type of interest rate swap in which two parties agree to exchange a series of interest rate payments based on a specified notional amount. One party pays a fixed rate of interest and the other pays a compounded or averaged interest rate based on a specified overnight index which is typically derived from specific overnight lending activity, such as the Federal Funds rate in the US.

In many currencies, OIS’ are commonly used as a benchmark for short-term interest rates, an alternative to existing or deprecated term IBOR fixings.  OIS are generally considered to be more robust than other short-term IBOR benchmarks because they are typically based on more liquid lending activity. As OIS are based on overnight lending, and in some cases collateralised overnight lending (e.g. SOFR in US dollars), OIS rates can be considered to represent a very low level of credit risk, lower than term IBOR rates.  In this respect, OIS rates can serve as a base level over which credit risk can be expressed as a credit spread.

In some currencies OIS swaps, based on ARRs (alternative reference rates) have replaced IBOR swaps completely, for example GBP (SONIA), JPY (TONA) and USD (SOFR) in June 2023.