Finadium: Total Return Futures, Total Return Swaps and the Repo Market

Total Return Futures (TRF) are emerging as a competitive product to repo and Total Return Swaps, as reported by Delta One trading desks and witnessed at exchanges and CCPs that are expanding their product sets. A new report from Finadium looks at product development, adoption trends and competition with bilateral products including repo and Total Return Swaps.

Interest in TRF 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.

The cash flow for TRF are straightforward, mimicking the economics of an equity index Total Return Swap. On Eurex or Euronext, an investor purchases a TRF contract at a TRF spread. Each day the total return of the index is calculated and netted against the floating rate leg plus the spread, with a credit or debit each day. The result is a daily profit or loss. Other contracts the investor may have in the netting pool at the exchange can be netted against the TRF, with the potential for reducing margin requirements. If an investor goes long or short a calendar spread in an effort to position against an equity repo curve, the exposure could offset nearly in its entirety.

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.

Finadium subscribers to our Securities Finance, Collateral and Derivatives series can log in here to access this report.

A direct link to the report for Finadium research clients is

For non-subscribers, more information is available here.

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