Total Return Futures, Total Return Swaps and the Repo Market
Finadium
April 2019
Total Return Futures (TRF) are emerging as a competitive product to repo and Total Return Swaps. This change is driven by balance sheet considerations at banks and the need to net down exposures while limiting risk-weighted asset calculations. As a centrally cleared product, TRF assist banks with Basel III ratio management. A projected European move towards daily calculation of the Leverage Ratio, following the US and UK models, adds to the overall market direction.
The growth of TRF and equivalent products is not just a European phenomenon; CME-listed contracts that provide the same types of exposure have seen increased attention over the last year, even as banks with healthy balance sheets have grown their prime brokerage and synthetic Delta One businesses.
While TRF is a useful product in the current standardized format, a future evolution could see the creation of customizable baskets that exclude the hardest to borrow components of an index, much as Total Return Swaps do today. With CCPs already accepting exposure on the remaining index underlyings, any sort of customization could encourage product adoption.
This report has been written for financing desks globally looking at their TRF opportunities, for exchanges and service providers supporting cleared and bilateral products, and regulators overseeing the banking and clearing industries.
Table of Contents
- Executive Summary
- Optimizing Balance Sheet Across Products
- – From Repo to TRS
- – From TRS to TRF
- The Mechanics of TRF
- – Underlyings and Dividends
- Why Trade TRF vs. Repo?
- Impact of Product Growth
- – The Customization Opportunity
- About the Authors
- About Finadium LLC