A swap which allows one of the counterparties to participate in favorable movements in the underlying rate/price, while giving that counterparty a means to place a cap on borrowing cost. Differently stated, this swap is usually used to hedge floating rate exposure while allowing the hedger to retain some gains from a favorable move in rates/ prices. For example, an interest rate swap which offers a participatory capability and where the floating rate payer can fix maximum payment of borrowed funds, while still having the ability to participate in any downward movement in interest rates.

In a participating swap, there is a participating cap on part of the notional principal modifying the swap’s floating rate payments.