The most basic version of a total return swap (TRS). By definition, it is a type of credit derivative in which the two counterparties agree to exchange the total return on a specified asset (like a corporate bond) or a portfolio of assets for a floating rate plus a given spread, over a specific period. At expiration date, a payment reflecting the change in the value of the asset should be made.

In a vanilla total return swap, the total return payer has the right to the reference asset (or portfolio of reference assets) and hence keeps the asset(s) on its balance sheet, and in specific cases can transfer associated rights such as voting rights, servicing, etc. In a normal yield curve setting, the total return payer will be protected against interest rate and credit risk over the specified term of the swap, while keeping the asset(s) on its balance sheet.

On the other leg, the total return receiver has an exposure to the asset(s) without an obligation to pay out the cash proceeds for purchasing it. The total return receiver may gain from positive carry (ability to roll over the short-term funding of a longer-maturity asset).