CoachIn an equity total return swap the dealer pays the client the total return (price change and dividends) of a stock on a notional amount, and the client pays a financing rate plus a spread on the same notional. The client has the economics of owning the stock financed by the dealer, who holds the actual shares as its hedge; the client posts margin agreed in the contract.
Examples
Example 6.15 (Archegos)
In March 2021 a family office, Archegos Capital Management, defaulted on margin calls from its dealers. It had built concentrated positions in a handful of stocks through total return swaps with several banks, positions which the SEC’s complaint later put at $36 billion. One of those banks, Credit Suisse, lost close to $5.5 billion. The report its board commissioned found that the bank had agreed to a swap margin of 7.5% — leverage above thirteen — that the margin was static, fixed on the price at which each swap was opened, so that as the stocks rose the average margin held fell to 6.9% of current value, and that a move to dynamic margining had not been given priority. When the stocks fell, every dealer held the same shares as its hedge, and each had to sell them into the others’ selling.