Total Return Swap

ORE introduces the product as follows:

Generic TRS can be used to represent total return swaps on a wide range of underlying assets including e.g. single bonds or equities, CFDs on an underlying basket of EquityPositions, proprietary indices on equity options and equity or bond indices.

Source: ORE User Guide, Products catalogue, totalReturnSwap.tex.

The trade types TotalReturnSwap and ContractForDifference behave exactly the same. The difference is commercial. ORE describes the CFD form as follows:

Usually CFDs are traded without a funding component and captured with only two dates in the return schedule, namely the start date on which the initial price is fixed and a fictitious closing date usually set to "tomorrow" or another suitable future date.

Source: ORE User Guide, Products catalogue, totalReturnSwap.tex.

A total return swap is a way to own an asset without buying it. The asset owner pays the price gains of the asset to the swap buyer, plus any income the asset produces. In return the swap buyer pays a funding rate on the asset value. The swap buyer gets the economic exposure. The asset owner keeps the legal ownership and its financing. A CFD is the same idea without the funding leg, used for short-term bets on the price.

ORE prices the product with an accrual method, not with a full discounting method:

The accrual method is common practice when daily unwind rights are present in the trade terms or when the underlying valuation is too complex to allow for future projection.

Source: ORE User Guide, Products catalogue, totalReturnSwap.tex.

The TotalReturnSwapData node is made of four sub-blocks.

UnderlyingData holds one or more Trade subnodes that describe the asset position. Each trade is a full trade of a supported type, such as Bond, BondFuture, ForwardBond, CBO, CommodityPosition, ConvertibleBond, CallableBond, EquityPosition, EquityOptionPosition, BondPosition or CashPosition. For a convertible bond or callable bond, a TRS on the plain bond type is enough: the pricer chooses the underlying from the reference data of the security id. A Derivative subnode holds an arbitrary derivative trade with an id, which supports portfolio swaps over several underlying derivatives. A PortfolioIndexTradeData subnode instead references a basket by BasketName, with IndexQuantity shares of the index. ORE notes the independence of the underlying schedule:

Notice that in every case, the UnderlyingData schedule (if applicable to the underlying trade type as e.g. for a bond) is completely independent from the funding / return schedules: The underlying schedule defines the underlying flows to compute its NPV, and is not directly related to the return swap itself.

Source: ORE User Guide, Products catalogue, totalReturnSwap.tex.

ReturnData describes the return leg. Payer says whether the leg is paid. Currency is the currency of the return. When it differs from the underlying currency the swap is composite; when it differs from the funding currency it is cross currency. Both features can occur alone or in combination. The ScheduleData node is the reference schedule. Valuation dates derive from it with ObservationLag, ObservationConvention and ObservationCalendar. Payment dates derive from it with PaymentLag, PaymentConvention and PaymentCalendar, or come as an explicit PaymentDates list of one date fewer than the schedule. InitialPrice is the underlying price on the valuation date of the start date, usually contractual. It can be a dirty price for bonds, a weighted price for baskets, an absolute amount when several underlyings or a derivative is present, or the NPV for a CBO. When omitted it defaults to the price on the valuation date of the start date, or to the forward price when that date is in the future. InitialPriceCurrency says whether the price is in the asset, return or funding currency. FXTerms is mandatory whenever the underlying, return, funding or cashflow currencies differ: each differing currency needs an FXIndex for the conversion. FXConversion picks the FX rate used at the start of the period, the default, or at its end.

Underlying cashflows flow through the return leg. ORE describes the option as follows:

If true, underlying cashflows like coupon or amortisation payments from bonds or dividend payments from equities, are paid when they occur. If false, these cashflows are paid together with the next return payment. If omitted, the default value is false for trade type TotalReturnSwap and true for trade type ContractForDifference.

Source: ORE User Guide, Products catalogue, totalReturnSwap.tex.

FundingData is optional and holds one or more funding LegData nodes. The allowed leg types are Fixed, Floating, CMS, CMB and ZeroCouponFixed. All funding legs share one payment currency. The notional of each funding leg follows a NotionalType: PeriodReset sets it from the underlying price on the last valuation date on or before the accrual start date of the coupon, converted at the FX rate of the same date; DailyReset sets it from the underlying price of each day of the accrual period, and supports fixed rate legs only; Fixed takes the notional given in the leg data. Without a NotionalType, the leg defaults to PeriodReset when it carries no notional and to Fixed when it does. FundingResetGracePeriod allows valuation dates a few calendar days after the accrual start date to count for the reset. AdditionalCashflowData is optional: a Cashflow leg of unpaid amounts in the asset, funding or return currency, included in the NPV.

ORE prices the return by accrual. The return over a period is the change in value of the underlying position:

(Ntl x today's price x today's Fx rate) - (Ntl x initial price x initial Fx rate).

With FXConversion End the second term converts the initial price at today's FX rate instead:

(Ntl x final price x final Fx rate) - (Ntl x initial price x final Fx rate).

The funding leg pays its rate on the notional determined by the NotionalType, as described above. The underlying trade is valued with its own engine and its own cashflows.

• The price of the underlying asset. It drives the return leg and the funding notionals.
• The income of the underlying: coupons and dividends, and the timing of their pass-through.
• The funding rate of the floating funding leg and its spread.
• The FX rates, when the return, funding or cashflow currencies differ from the asset currency.
• The interest rates that discount the flows.

Each return period settles the price move of the underlying. The underlying cashflows pass through on occurrence, or with the next return payment, per the flag above. The funding notionals reset per period or per day, depending on their type. Because ORE prices by accrual, the swap tracks the underlying closely on every valuation date, which suits daily unwind rights. A CFD runs from its start date to its closing date and then settles.

A total return swap gives exposure to an asset without owning it. Hedge funds use TRSs to lever positions or to short assets they cannot borrow. Banks use them to fund long positions. Retail and institutional clients use CFDs for leveraged price bets. In ORE Studio a customer books TRSs and CFDs to value them and run sensitivities on the ORE engine.

ORE's catalogue shows a generic total return swap on a convertible bond, with a daily-reset fixed funding leg, a period-reset floating funding leg, and an additional cashflow leg:

<TotalReturnSwapData>
  <UnderlyingData>
    <Trade>
      <TradeType>Bond</TradeType>
      <BondData>
        <SecurityId>ISIN:XY1000000000</SecurityId>
        <BondNotional>1000000.00</BondNotional>
      </BondData>
    </Trade>
  </UnderlyingData>
  <ReturnData>
    <Payer>false</Payer>
    <Currency>EUR</Currency>
    <ScheduleData>...</ScheduleData>
    <ObservationLag>0D</ObservationLag>
    <ObservationConvention>P</ObservationConvention>
    <ObservationCalendar>USD</ObservationCalendar>
    <PaymentLag>2D</PaymentLag>
    <PaymentConvention>F</PaymentConvention>
    <PaymentCalendar>TARGET</PaymentCalendar>
    <!-- <PaymentDates> -->
    <!--   <PaymentDate> ... </PaymentDate> -->
    <!--   <PaymentDate> ... </PaymentDate> -->
    <!-- </PaymentDates> -->
    <InitialPrice>1.05</InitialPrice>
    <InitialPriceCurrency>EUR</InitialPriceCurrency>
    <FXTerms>
      <FXIndex>FX-ECB-EUR-USD</FXIndex>
      <FXIndex>FX-ECB-GBP-USD</FXIndex>
    </FXTerms>
    <PayUnderlyingCashFlowsImmediately>false</PayUnderlyingCashFlowsImmediately>
  </ReturnData>
  <FundingData>
    <FundingResetGracePeriod>2</FundingResetGracePeriod>
    <NotionalType>DailyReset</NotionalType>
    <LegData>
      <Payer>true</Payer>
      <LegType>Fixed</LegType>
      ...
    </LegData>
    <NotionalType>PeriodReset</NotionalType>
    <LegData>
      <Payer>true</Payer>
      <LegType>Floating</LegType>
      ...
    </LegData>
  </FundingData>
  <AdditionalCashflowData>
    <LegData>
      <Payer>false</Payer>
      <LegType>Cashflow</LegType>
      ...
    </LegData>
  </AdditionalCashflowData>
</TotalReturnSwapData>

Source: ORE User Guide, Products catalogue, totalReturnSwap.tex, listing Generic Total Return Swap with Convertible Bond underlying. The catalogue shows further variants: equity basket, bond basket, bond future, commodity index and derivative underlyings, a PortfolioIndexTradeData underlying, and a CFD on STOXX50E with initial price 3399.20.