October 2020

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Total Return Swaps (TRS) have become an important tool for banks to manage their balance sheets, Basel ratios and GSIB exposures. The synthetic financing market has been growing for years, but for the first time has surpassed physical securities finance as a revenue generator for prime brokers. This important shift is the result of bank efficiency, resource optimization and technology efforts. It also means changes for the diverse ecosystem of market participants in the physical securities finance industry.

This report provides bank revenues in synthetic and physical securities financing through H2 2020, capturing the exceptional volatility that occurred in March and April of this year. A multi-year comparison shows the evolution of this sector and gives indications about where synthetic financing is headed. It looks at both equity and fixed income Total Return Swaps as well as similar structured products that play the same economic role with different names.

The report also assists with understanding the particular dynamics of TRS transactions. The opportunity to net down bilateral exposure or even to clear these products means a substantial savings in capital risk ratios. Knowing how the trade works is an important part of understanding how it fits in bank resource optimization.

This report is useful reading for market participants engaged in the equity markets trading derivatives, using margin or shorting securities, or managing economically similar products like securities lending and listed derivatives.

Table of Contents

  • Executive Summary
  • Market Volatility and the Pull of Financial Gravity
  • Sizing the Equity TRS Market
    • – More TRS or Less Securities Lending?
    • – The Value of Volatility
  • The Fixed Income Expansion
    • – Fixed Income Financing Revenues
  • The Post-COVID Market for Balance Sheet
  • Appendix A: Mechanics of the Trade
  • About the Author
  • About Finadium LLC

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