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Total return swap (TRS) meaning
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What does Total return swap (TRS) mean?
A total return swap (TRS) is a bilateral over-the-counter derivative transaction used to transfer the full economic performance of a reference asset (for example, a bond, loan, share or index) without transferring legal ownership. The total return payer (TRS payer, often described in credit parlance as the protection buyer) agrees to deliver to the total return receiver (TRS receiver, often the protection seller) the asset’s total return—income, fees and any price appreciation—while the receiver pays the payer a funding leg, typically a floating rate (such as SONIA or EURIBOR) plus a spread. If the asset falls in value or incurs credit losses, the negative return flows from the receiver to the payer.
TRSs provide synthetic long or short exposure, reallocate both market and credit risk, and are commonly used for hedging, leverage and financing as an alternative to a repo or asset sale. They are usually cash-settled, collateralised and documented under an ISDA Master Agreement with product-specific definitions (equity or credit). “Total return swap” is a market term rather than a statutory definition, though it is recognised under UK EMIR/EU EMIR as an OTC derivative for reporting, risk mitigation and (if uncleared) margin purposes. Usage and legal effect are broadly consistent across...
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View the related Practice Notes about Total return swap (TRS)
PRACTICE NOTES
Total Return Swap (TRS) Structure and Mechanics: Parties, SONIA-Linked Cash Flows, and Total Return/Depreciation Transfers
How does a total return swap (TRS) work? The TRS payer (protection seller) is, for instance, a bank, A, and the TRS receiver (protection buyer) is, for instance, a hedge fund, insurance company, pension scheme, UCITS or another investment fund, B. A keeps the reference asset on its balance sheet. A agrees ...
22 May
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PRACTICE NOTES
Total return swaps (TRS) in the UK: structure, classification, parties, advantages/risks, SFTR investor transparency and ISDA documentation
What does this Practice Note cover? This Practice Note outlines the principal aspects of a total return (or total rate of return) swap (TRS), including: what a TRS is how it is classified who enters into a TRS, and how to document a TRS What is a total return swap? A TRS is a derivatives agreement through which one party transfers the complete economic performance, including income from interest and fees, gains and losses arising from price movements, and credit losses, of a reference obligation to another party. TRSs may replicate the effect of securities financing transactions (SFTs)—they can function as synthetic repo instruments for funding purposes. SFTs and TRSs are used extensively by managers of collective investment undertakings to obtain exposure to certain strategies or enhance their returns. A TRS is an over-the-counter, off balance sheet transaction. One participant, the total return payer (the TRS payer or ‘beneficiary’), will pay to the other participant, the total return receiver...
22 May
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PRACTICE NOTES
Derivatives in structured finance and securitisation: risk hedging, SPV constraints, ISDA documentation, counterparty rating criteria, and synthetic structures (CDS, CLNs, TRS)
What does this Practice Note cover? Derivatives are a staple of structured finance, appearing in many guises (eg swaps, options and forwards). They are commonly deployed to reshape the cash flows an issuer receives from the underlying asset pool into the revenue profile required to meet payment obligations on the securities issued to finance that asset. In practice, these arrangements align asset cash flows with liability profiles. This Practice Note sets out the main categories and purposes of derivatives in structured finance transactions. It also describes their uses within structured finance transactions, including: interest rate swaps currency rate swaps credit default swaps credit linked notes total return swaps A variety of institutions, such as banks and insurance companies, may serve as the swap counterparty in a structured finance transaction...
21 May
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