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 Total Return SwapsReconciliation

Process Overview

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 The D. E. Shaw Group

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 Total Return Swaps - Denition

A Total Return Swap (TRS) is a bilateral transaction wherethe counterparties swap the total return o a sin!le asset orbas"et o assets in e#chan!e or perio$ic cash %ows t&picall&un$in!

! The Return "e# is #enerall$ %a&e up o' two co%ponents( cash

)ows an& capital appreciation or &epreciation o' the re'erenceasset

! The +un&in# "e# also is ,ase& on "OR /- a sprea&

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 Total Return Swaps ! Structure o' the transaction

The Total Return Swap 'ar"et is strictl& institutional oer the counter (OTC)

TRS can be structure$ on an& t&pe o asset ie e*uit& swap+ preerre$ swap

Details o the transaction are a!ree$ upon in a written con,r'ation

Total Return Swaps are $ocu'ente$ usin! a stan$ar$ International Swapsan$ Deriaties Association (ISDA wwwis$aor!) -aster A!ree'ent an$Sche$ule. which !oerns swaps between two parties The SwapCon,r'ation (/Con,r'/) is usuall& a custo'i0e$ $ocu'ent The Con,r'sets the actual tra$e ter's o the TRS. which 'a& ar& wi$el& $epen$in! on

the reerence asset(s) an$ parties

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 Total Return Swaps ! h$ enter into Swapontract 1e$!e Fun$s hope to !enerate hi!h asset returns without

hain! to tie up their capital b& bu&in! those assets or itsown account ie /leera!e$ balance sheet arbitra!e2

Le!al nor's o the econo'&

The ban"s. un$s. or $ealers hope to !enerate a$$itionalcash %ow b& char!in! a sprea$ oer an$ aboe the 'ar"etreturns the& receie ro' len$in! or other actiities. an$receiin! a !uarantee a!ainst $epreciation o the assets

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 Total Return Swaps !ash %ove&

3a&'ents Receie$ b& Total Return Receier45 I reerence asset is an e*uit& . the $ii$en$. i bon$ the coupon5 The price appreciation. i an&. o the reerence asset since the last ,#in!$ate

3a&'ents Receie$ b& the Total Return 3a&er4

5 The perio$ic %oatin! pa&'ent (usuall& LI6OR 785 a sprea$)5 The price $epreciation. i an&. o the reerence asset since the last ,#in!$ate

The cash %ows aboe are t&picall& nette$ an$ e#chan!e$ in a sin!le pa&'entI the counterparties hae 'ultiple tra$es to!ether an$ are operatin! un$er anettin! a!ree'ent. then the net cash %ows ro' the TRS 'a& be nette$ out

with other tra$es an$ a sin!le pa&'ent 'a$e coerin! all tra$es

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o%%on Ter%s

9n$erl&in!

Reset Date

Reset Settle Date

Swap Nu'ber

Financin!

3rice Return

Ter'ination Return

Corporate action

Open tra$e e*uit&

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Reconciliation

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Swap Reconciliation wh$ we &o it Initiall& we use$ to a!ree bro"er nu'bers. allowin! hi' to

hae sprea$s unreconcile$ Also reset prices were :ustaccepte$ Now rather than a!reein! to bro"er we hae ownnu'bers to substantiate receipts8pa&'ents

Entire European an$ 'a:or Asian tra$in! $one throu!h TRS

-ost e;cienc& is create$ when process is centrali0e$ an$$one b& a tea' or all !roups

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Swaps Reconciliation Process Overview

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"oo3 at the report Shaw si$e report

D6 si$e report

Reconciliation Report

Report proi$e$ to acct ops

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hallen#es Nu'ber o pieces inole$ to hae a reset report

Ti'e nee$e$ to !et the entire set o reports

Co'parison usin! e#cels

T t l R t S

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 Total Return Swaps !E4a%ple 5euit$ Swap7

Assu'e on notional o E$$ie 6auer on swap B with D6

! The tra&e is usuall$ ,oo3e& ,$ +O or 8i&&le O9ce with +Oapproval.

! ac3 O9ce conr%s the tra&e &etails an& swap ter%s with

counterpart$

! ac3 O9ce sen&s the &etails to Swap Tea%

! Swap tea% up&ates ter%s in Geneva

Total Return Swaps

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 Total Return Swaps !E4a%ple 5euit$ Swap7

Ter's a!ree$ with D6 are to reset Open tra$e e*uit& at each-onth en$ with pa& $ate e*ual to Reset $ate

E$$ie 6auer pai$ a $ii$en$ on ? B

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 Total Return Swaps !E4a%ple 5euit$ Swap7

hat is the pnl on the swapH

! Swap Divi&en& o' :100 ; 1 < :100

! Price return o' 5:1007; 51=-107 ?@.2= !A 1000;0.0@2=;1B/C60< 5:2.12=7

! Total net is :=.B= ! we are lon# an& there'ore the TRSreceiver an& we e4pect to ,e #ettin# this cash 'ro% D

Total Return Swaps

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Fuestions