Total return swaps


Published by a UUÂãÁÄÖ±²¥ Banking & Finance expert
Practice notes

Total return swaps


Published by a UUÂãÁÄÖ±²¥ Banking & Finance expert

Practice notes
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What is a total return swap?

A total return (or total rate of return) swap (TRS) is derivative contract in which one counterparty transfers the total economic performance, including income from interest and fees, gains and losses from price movements, and credit losses, of a reference obligation to another counterparty. TRSs can have an effect that is equivalent to securities financing transactions (SFTs)—TRSs can be used as synthetic repo instruments for funding purposes. SFTs and TRSs are used extensively by managers of collective investment undertakings to get exposure to certain strategies or enhance their returns. A TRS is an Over-the-counter, off balance-sheet transaction.

One party, the total return payer (the TRS payer or ‘beneficiary’) will pay to the other party, the total return receiver (the TRS receiver or ‘guarantor’), the actual income (or rate of return) on the underlying asset(s) (known as the reference asset(s)) and any change in the market value of reference assets if there is any capital appreciation. In exchange for receiving this payment, the TRS receiver will periodically pay to the TRS payer a payment based

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Basket definition
What does Basket mean?

The term 'basket' typically refers to flexibility built into negative undertakings in the facilities agreement which allows the borrowing group to take the action restricted by the relevant undertaking (eg incurring debt or making acquisitions) up to the level specified in the 'basket'. Where there is a specified cap on the amount of eg additional debt that can be incurred annually or over the life of the facilities, this is known as a 'hard cap' basket. Where the cap can change with reference to a variable such as EBITDA or is capable of growing depending on the performance of the business, this is known as a 'soft cap' basket.

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