A type of derivative that replicates the cash flows of an investment in an asset, usually a security, basket of securities, index or other financial instrument. A TRS requires the parties to make payments to each other based on the performance of the underlying asset.

Under a TRS, one party, Party A, often called the equity amount receiver, receives payment from the other, Party B, the equity amount payer, based on the appreciation in value of the asset(s) over a certain specified period (often monthly) or makes payments to Party B based on a decline in value of the asset during the specified period. This type of arrangement is often referred to as a synthetic investment.

A TRS permits Party A to simulate investment in the underlying asset(s) without incurring the burden of ownership of the asset(s), including any adverse balance-sheet implications. The TRS simultaneously permits Party B to protect itself against a decline in value of the underlying asset(s).

For further information and a detailed example of a TRS, including hedge, see Practice Note, Equity Derivatives: Overview (US): Total Return Swap (TRS).