January 2018

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The Total Return Swaps (TRS) business has enjoyed substantial growth in the last three years, with infrastructure, operations, and technology providers adapting to meet new bank and client demand for trading and post-trade services. The ecosystem is not only growing for traditional use of TRS in synthetic financing; users are also emerging for TRS as a tested product to satisfy new client and counterparty demands that were never envisioned in the product’s early days.

The biggest competition for TRS is still repo and Stock Borrow Loan, but regulatory decision making on calculating balance sheet exposure has inadvertently preferenced TRS in many cases over the physical equivalent. While repo and SBL will continue to play a role in the market, banks have a justifiable rationale for executing TRS trades where possible. This imbalance is slowly being recognized in the regulatory community, but it may take some years before it is adequately addressed.

In this report, we examine the current state of the TRS market through conversations with major market participants and a review of bank financial statements. Our conversations indicate market optimism and a certain degree of excitement about TRS, especially in the face of penalizing regulations against cash financing. Our investigation into the size of the TRS market shows a substantial revenue opportunity underway. We also document the major dealer players in the market from prime brokers to bank treasury desks.

This report is useful reading for any market participant in the swaps, financing, or collateral business.

Table of Contents

  • Executive Summary
  • The Total Return Swaps Boom
    • – Netting It Out
  • Sizing the TRS Marketplace
  • Mechanics of the Trade
  • Bank and Conduit Participants in the Market
    • – Delta One
    • – Prime Brokers
    • – Treasury Funding Desks
    • – Repo Conduits
  • Business Considerations of TRS vs Securities Lending and Repo
    • – Cross-Divisional Risk Management
    • – Scale of the TRS Balance Sheet Benefit
  • Looking Forward: Regulation and Technology
  • About the Author
  • About Finadium LLC

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