Payment company Ripple enters leveraged ETF swap financing

The cryptocurrency payment company Ripple has expanded into stablecoins, asset custody, and has entered the long-term leveraged exchange-traded fund (ETF) swap financing sector, which has been dominated by large banks, becoming an important participant. According to The Wall Street Journal, leveraged ETF managers achieve target returns through total return swaps and other derivatives, such as amplifying the daily fluctuations of a particular stock or index; banks or brokers sell related contracts and charge fees, then buy stocks or derivatives to hedge their own exposure.

According to Morningstar Direct, there are 593 leveraged ETFs in the United States, managing over $256 billion in assets, of which 426 are single-stock leveraged funds, a category that received regulatory approval in 2022. Ripple entered swap financing after acquiring the prime broker Hidden Road, which caters to cryptocurrency hedge funds last year; this business is now called Ripple Prime, which is collaborating with multiple ETF providers and hopes to expand to include other investment managers, including hedge funds.

On Tuesday, Ripple Prime announced it would provide prime brokerage, clearing, and financing services to the hedge fund Brevan Howard. Ripple Prime President Noel Kimmel stated that this is a growing and significant part of the company's business. The report cited an example where a fund paid Ripple at a rate of 4 percentage points above the overnight bank financing rate, which as of Tuesday was approximately equivalent to 8% of the fund's assets on an annualized basis; this cost is included in the net asset value of the leveraged fund, separate from the approximately 1% management fee.