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Price alignment interest
Price alignment interest is a payment made by the holder of margin collateral on cleared and non-cleared derivatives contracts.
Swap counterparties exchange variation margin payments, usually in the form of cash, to account for changes in the underlying instrument’s value. The receiver of margin pays price alignment interest to compensate the other party for the funding cost of the posted collateral.
Price alignment interest is calculated daily using an overnight benchmark rate, which differs according to swap currency. For example, US dollar-denominated swaps use the secured overnight financing rate, or SOFR, while euro-denominated swaps use the euro short-term rate, or €STR.