A basis swap in which the reference rates on which are based the two interest payment legs are set at different points on the yield curve. Payments on the two legs reset with the same frequency irrespective of the reference rate. Differently stated, this swap entails the exchange of a shorter-term floating rate index for a longer-term floating rate index. This swap can be viewed as a series of forward swaps each of which starts on the yield curve arbitrage swap’s reset dates.

For example, one party to a swap may pay three month LIBOR and receive the ten year CMS rate less 100 basis points. If the spread between short and long rates narrows, that party can stick to the swap, as it is gets more favorable. In the opposite case, it would be better for that party to reverse the swap or close it out.

This swap is also known a yield curve swap.