Total return swap
|Equity Derivatives Anatomy™|
A total return swap, or TRS is a swap that pays a total return on an underlying security or basket of securities. All returns, such as dividends and the results of corporate actions, are included. An equity TRS includes all gains and losses equivalent to holding the underlying share and no part of the return is excluded.
Defined for the purposes of SFTR as follows:
- total return swap means a derivative contract as defined in point (7) of Article 2 of Regulation (EU) No 648/2012 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.
A derivative contract, in turn — and you’ll love this — is defined as per MiFID as follows:
- ‘derivative’ or ‘derivative contract’ means a financial instrument as set out in points (4) to (10) of Section C of Annex I to 2004/39/EC (EUR Lex) as implemented by Article 38 and 39 of 1287/2006 (EUR Lex);
In a nutshell this means options, futures, swaps, forward rate agreements and any other derivative contracts relatiing to
- securities, currencies, interest rates or yields, or other derivatives instruments, indices or financial measures
- cash settled commodities;
- exchange traded physically settled commodities;
- physically settled commodities that otherwise have the characteristics of derivative contracts
- credit derivatives
- contracts for difference