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Total Return Swap (TRS)

Transfer full economic exposure (coupons + price changes) of an asset without selling it. Synthetic ownership transfer.

Risk Transfer
Complexity
Intermediate
Deal Size
$25M - $500M
Typical Tenor
3 years
Scalability
Medium
#risk-transfer#derivatives#synthetic#capital-relief#hedge
Mini Map

Flow Types

Cash
Collateral
Fee
Interest

Transaction Timeline

Phase 1: Initiation(T+0)

TRS agreement executed, initial margin posted, reference asset defined.

Use Cases

  • •Gain synthetic exposure without buying the asset
  • •Hedge existing positions while keeping ownership
  • •Reduce RWA/capital without selling client relationships
  • •Leverage investment returns
  • •Access restricted markets or asset classes

Problem Solved

Allows risk transfer without triggering a sale, maintaining client relationships and avoiding transaction costs while achieving capital/exposure relief.

Revenue Calculator

Model deal economics

$100M
$25M$500M
65 bps
5 bps200 bps
10 bps
23 bps

Projected Revenue

Gross Carry Income$325,000
Funding Cost($50,000)
Net Carry$275,000
Upfront Fees$230,000
Total Revenue$505,000
Annualized Return
101.0 bps
If Repeated Annually
$1,010,000

Revenue Sources

Carry Income

TRS Spread30-100 bps

Spread earned over funding cost if taking receiver position

Quarterly(Asset Yield - Funding Rate) × Notional × (Days / 360)
Financing Income30-100 bps

If acting as payer, earn funding rate while transferring risk

QuarterlyFunding Spread × Notional × (Days / 360)

Fee Income

Structuring FeeOne-time
15-30 bps

One-time fee for setting up the swap

Administration Fee
5-10 bps

Ongoing administration and reporting

Regulatory Checkpoints

Margin RequirementsEMIR / Dodd-Frank

Uncleared derivatives require initial and variation margin.

Risk Flags

Counterparty Credit RiskHigh

Exposure to counterparty default, especially for unfunded TRS

Mitigation:Collateralization, CSA agreements, central clearing where available
Basis RiskMedium

Reference asset performance may not match expectations

Mitigation:Clear reference asset definitions, robust valuation methodology
Regulatory Arbitrage PerceptionHigh

Regulators scrutinize TRS for artificial capital relief without true risk transfer

Mitigation:Document genuine risk transfer, avoid excessive leverage, transparent reporting