Page "Swaption" Paragraph 13

The swaption market is over-the-counter ( OTC ), i. e., not traded on any exchange.

Legally, a swaption is an agreement between the two counterparties to exchange the required payments.

The counterparties are exposed to each others ' failure to make scheduled payments on the underlying swap, although this exposure is typically mitigated through the use of " collateral agreements " whereby margin is posted to cover the anticipated future exposure.