A structured swap in which the swap counterparty agrees to adjust the notional principal amount in a fashion that matches the actual outstanding balance on the receivables pool, assets or securities of a mortgage over time. In a balance guaranteed swap, the counterparties exchange the collected coupons on a collateral portfolio of mortgage loans for a reference LIBOR plus a specific spread. The notional of the swap is the total notional of surviving loans for the period. Characteristically, the notional is determined by the prepayments, defaults, and arrears in the reference portfolio. Therefore, this notional changes in an uncertain manner.

This swap is mainly used as part of securitization process. Typically, the notional principal amount amortizes with no partial termination payments ever payable. This structure tracks the swap and collateral balances, and may provide some form of locking in the total outstanding balance for the referencing mortgage loan portfolio. However, it doesn’t guarantee the balance, as it can’t, by nature, hedge prepayment risk or default risk.