Total return swap
Also known as: TRS
A total return swap is an agreement between two parties in which one side pays the other the total return of an asset, including both price appreciation and any income like or interest, in exchange for receiving a fixed or floating interest payment instead. The party receiving the total return gets the economic exposure to the asset without actually owning it, while the party paying the total return keeps legal ownership of the asset but transfers its investment risk and reward to the other side.
The party receiving the total return, often a , benefits if the asset's price rises and any income it pays out is positive, but must pay the other side if the asset's price falls, on top of the fixed or floating rate owed. This structure lets an investor gain exposure to a , , index, or basket of with and without needing to hold the underlying asset directly, avoiding the capital outlay, some regulatory requirements, and in some cases the disclosure obligations that would come with owning the position outright.
Total return swaps are used mainly by and rather than , since they are customized, privately negotiated contracts arranged through banks rather than instruments traded on public exchanges. Because the arrangement is built on and relies on the bank to honor its side of the deal, total return swaps carry meaningful , and a large position built through swaps can be far less visible to the market than an equivalent direct holding would be.