Total Return Swaps. A total return swap (“TRS”) is a forward contract that requires final settlement in cash in relation to a fixing value on the expiry date, rather than providing for delivery of the underlying financial instrument(s). The fixing value is determined by the Bank, normally based on realisation of the financial instruments held by the Bank as a hedge for the swap. If the underlying position is large compared to the trading volume in the underlying financial instruments, the Bank may start to realise its hedge before the expiry day, over several stock-exchange trading days. In such cases, the Bank’s average price on realisation of the hedge will be used as a basis for settlement. A purchaser of a swap has no right to purchase the underlying financial instruments (the Bank’s hedge) from the Bank and has no authority to give instructions relating to the Bank’s hedge. The purchaser similarly has no pre-emption rights in respect of the Bank’s hedge if the Bank chooses to dispose of it. Swaps may, by agreement with the Bank, be closed out before the expiry date. In the case of such early settlement, the fixing value will be determined on the basis of the principles set forth above.
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