Total return swaps
Total return swaps

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Total return swaps
  • What is a total return swap?
  • Why is a TRS classified as a credit derivative?
  • Who enters into total return swaps?
  • A step by step guide to how a total return swap works
  • Why enter into a total return swap?
  • Documentation for a total return swap

What is a total return swap?

A total return (or total rate of return) swap, (TRS), is a method of transferring the credit and market, risk of an asset or basket of assets from one party to another party. It is an over-the-counter, off balance-sheet transaction.

One party, the total return payer (the TRS payer) will pay to the other party, the total return receiver (the TRS receiver) the actual income (or rate of return) on the asset(s) (known as the reference asset(s)). In exchange for receiving this payment, the TRS receiver will periodically pay to the TRS payer a payment based on the notional value of the reference asset(s). This payment typically represents the cost of funding the ownership of the reference asset and will usually be a floating rate (such as EURIBOR or LIBOR) plus a margin. The parties will agree in advance what the reference assets are and the notional value of the reference assets. Reference assets can be nearly any type of asset, including bonds, loans, collateralised debt obligation (CDO) notes, equity securities or real property.

The TRS receiver, who is the party that takes on the risk of the reference asset's performance, will pay to the TRS payer any decrease in the market value of the reference assets, either periodically