Invest1 publisher2 min readPublished
Jane Street begins writing the total return swaps inside leveraged ETFs
Jane Street already trades leveraged ETFs and creates their shares. Now it is writing the total return swaps inside them, a business a handful of banks have had to themselves.
The Investor · Invest desk
What happened
- Jane Street Group has started providing swaps to leveraged ETFs, a business long controlled by a handful of major banks and specialized dealers.
- A fund promising twice the daily move of the S&P 500 does not buy twice the stocks; it enters total return swap agreements with counterparties, typically banks, that deliver the leveraged performance synthetically.
- The new step is moving from facilitating trading in these funds to providing the derivative contracts that generate their leverage.
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Why it matters
- capability An issuer putting together a leveraged fund can now ask for a quote from a counterparty outside the bank and dealer group that has held the business.
- decision Issuers who take that quote have to decide whether they want the same firm creating their shares and writing the swap that supplies their exposure.
- precedent A market maker moving from trading a product to supplying the contract inside it gives the next authorized participant with a large ETF book an argument to do the same.
A fund that promises twice the daily move of the S&P 500 does not buy twice the stocks. It buys the return, through total return swap agreements written by a counterparty that is usually a bank [2]. Each dollar of fund assets needs two dollars of index exposure behind it [1]. Futures and other derivatives cover some of that exposure, and most of it comes from the swap [3].
Jane Street was already on the other side of this trade. It is one of the world's largest liquidity providers, trading thousands of ETFs across equities, fixed income and commodities [4]. It also acts as authorized participant for numerous issuers, creating and redeeming the shares that keep fund prices in line with the value of the assets underneath [5]. It will now write the contracts as well as trade the shares [7], and hold the exposure for the life of each swap it writes.
Crypto Briefing, which reported the expansion, wrote that it "could reshape pricing and liquidity in one of finance's most profitable niches" [8]. The article did not publish the size of the book or the spread Jane Street quotes, and the only issuer it names is Leverage Shares, a provider of leveraged and inverse exchange-traded products [6].
Several outcomes fit what is on the record. Jane Street writes swaps only for issuers it already services, the book stays small, and bank desks never reprice. Or it quotes tight to win flow, the incumbent dealers match for their own clients, and issuers keep the saving while the dealer list looks the same. Or the business it wins comes from issuers who could not get a swap written before, in which case more product launches and the spread on existing funds does not move.
I would expect the second, because hedging is the advantage: a firm that trades thousands of ETFs and creates their shares [4][5] is pricing a swap against a book it already runs. The test is narrow. If the counterparty lists in leveraged fund documents still show only banks a year from now, or if Jane Street's swaps turn up only in Leverage Shares products [6], then a non-bank writer has changed one name on the dealer list and left the price where it was.
What to watch
- Whether Jane Street discloses the size of its leveraged ETF swap book or the terms it quotes.
- Whether an issuer outside the leveraged and inverse niche names Jane Street as a swap counterparty.
- Whether regulators comment on one firm acting as both authorized participant and swap writer for the same fund.