Interest rate swaps are simply a form of multiple period FRAs. The term of the agreements may be a matter of many months or even years. As is the case with FRAs there is no exchange of principal.
The netting effect disguises the true nature of this transaction. The duration of an asset or liability that is repriced against market rates on a frequent basis is close to zero. That is not the case for a fixed rate asset or liability. In fact the fixed rate payer has effectively shortened duration while the floating rate receiver has lengthened it.
An international swaps dealers association is largely responsible for having established standardized international swap agreements. One of the early legal challenges was to come up with a structure where in the event of one party breaching a swap agreement on which it is due to make payments the other party is under no obligation to continue to make payments on other swap contracts. This reduces the potential exposures of both participants in the event of either party becoming bankrupt. In entering into swap agreements banks are potentially exposed to credit risk. For swap contracts where the bank is a net payer there is clearly no credit risk. Credit risk only arises on contracts where the bank is a net receiver.