Ripple Enters Leveraged ETF Swap Financing

Crypto payments company Ripple has expanded into stablecoins, asset custody, and other businesses, and has become a significant participant in leveraged exchange-traded fund (ETF) swap financing, a field long dominated by large banks. According to The Wall Street Journal, leveraged ETF managers use total return swaps and other derivatives to achieve target returns, such as amplifying the daily moves of a stock or index; banks or brokers sell the 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 U.S. with over $256 billion in assets under management, of which 426 are single-stock leveraged funds, a category that regulators approved in 2022. Ripple entered swap financing last year after acquiring Hidden Road, a prime broker for crypto hedge funds; the business, now called Ripple Prime, is working with multiple ETF providers and hopes to expand to other investment managers, including hedge funds. On Tuesday, Ripple Prime announced it would provide prime brokerage, clearing, and financing services to hedge fund Brevan Howard. Ripple Prime President Noel Kimmel said this is a growing and meaningful part of the company's business. The report cited an example where a fund pays Ripple the overnight bank financing rate plus 4 percentage points, equivalent to roughly 8% of fund assets annually as of Tuesday, with the cost included in the leveraged fund's net asset value, separate from the roughly 1% management fee.