Ripple Expands Prime Brokerage to Offer Swap Financing for Leveraged ETFs

Ripple is expanding its prime brokerage services to offer swap financing for leveraged ETFs, entering a traditional finance sector traditionally dominated by banks. This strategic move, facilitated by the acquisition of Hidden Road (now Ripple Prime), positions the company to compete in a fee-heavy segment of the market.

According to a Wall Street Journal report, Ripple entered the leveraged ETF swap financing business last year through its $1.25 billion acquisition of Hidden Road. The platform is now actively engaging with ETF providers and seeking business from other investment managers, including hedge funds. On October 6, Ripple Prime announced its prime brokerage, clearing, and financing services for Brevan Howard, adding another hedge fund to its client roster. Noel Kimmel, president of Ripple Prime, described swap financing as a “growing and meaningful part” of the business.

Leveraged ETFs use derivative instruments, such as total return swaps, to amplify the daily performance of stocks or indexes. These swaps are provided by banks or brokers at a cost, with the provider typically hedging the exposure by purchasing the underlying security. Morningstar Direct data, quoted by the Wall Street Journal, indicates that there are 593 US leveraged ETFs with over $256 billion in assets. Single-stock leveraged funds constitute a significant portion of this market, with 426 such ETFs, a category that regulators first approved in 2022.

The competitive landscape is shifting as banks face tighter capital limits on the risk they can assume. This has created an opening for nonbank firms like Jane Street and Clear Street, which are also increasing their presence in this space. Ripple’s expansion into swap financing signifies a strategic diversification beyond its core cryptocurrency trading and payments operations, moving its prime brokerage into a financing business that has historically generated substantial fees for Wall Street firms.

One example illustrating the fee potential is the Tradr 2X Long SDNK Daily ETF. This fund pays Ripple a fee tied to the overnight bank funding rate plus four percentage points. As of October 7, this amounted to approximately 8% of the fund’s assets on an annualized basis. These financing charges are distinct from management fees and are incorporated into the ETF’s net asset value.

However, the Wall Street Journal report also highlights potential risks. If leveraged ETFs are held by investors over extended periods, the compounding swap costs, combined with market movements, can become very expensive for returns. Furthermore, swap financing carries inherent risks for providers. A substantial one-day decline in an underlying stock could deplete a leveraged ETF’s equity, potentially leading to losses for its counterparty. Providers mitigate this exposure by hedging through other asset managers or market makers.

As CryptoPotato reported yesterday, Ripple Prime has expanded its relationship with Brevan Howard to encompass multi-asset prime brokerage, clearing, and financing. This development follows Hidden Road’s earlier expansion into US institutional crypto OTC swaps, cross-margining, and financing after its acquisition by Ripple.

It is important to note that the exact total value of swap financing provided by Ripple remains undisclosed. Additionally, the specific risks Ripple faces in this venture and the effectiveness of its hedging strategies are not fully detailed. The long-term impact of compounding swap costs on leveraged ETF returns for investors also presents an area of uncertainty.

Why This Matters

The materials describe a narrow update: Ripple, through its acquisition of Hidden Road (now Ripple Prime), is providing swap financing to leveraged ETF providers. The exact total value of swap financing provided by Ripple.

Broader Context

Source materials place the factual news in this context: Ripple is moving deeper into Wall Street’s leveraged ETF business, with its prime brokerage arm providing swap financing to funds that use derivatives to amplify bets on stocks and indexes.