Ripple is expanding deeper into institutional finance, moving beyond crypto payments into stablecoins, custody and now swap financing for leveraged exchange-traded funds, a market long dominated by large banks. The development was reported by The Wall Street Journal, which described how leveraged ETF managers use total return swaps and other derivatives to achieve targeted daily exposure to a stock or index, while banks or brokers sell those contracts, collect fees and hedge their own exposure in the market.
Data from Morningstar Direct shows there are 593 leveraged ETFs in the United States with more than $256 billion in assets under management. Of those, 426 are single-stock leveraged funds, a category that regulators allowed in 2022. Ripple entered the swap-financing business after acquiring Hidden Road, a prime broker serving crypto hedge funds, last year. That operation is now called Ripple Prime.
Ripple Prime is working with multiple ETF providers and wants to expand the business to other investment managers, including hedge funds. On Tuesday, the company said it will provide prime brokerage, clearing and financing services to hedge fund Brevan Howard. Ripple Prime president Noel Kimmel said the segment is a growing and meaningful part of the company’s business.
Ripple has expanded beyond crypto payments into stablecoins, custody and swap financing for leveraged exchange-traded funds, entering a business that has long been dominated by large banks, according to ChainCatcher, citing The Wall Street Journal.
The report said managers of leveraged ETFs use total return swaps and other derivatives to reach their target returns, such as amplifying the daily move of a stock or an index. Banks or brokers sell those contracts, charge fees, and then buy stocks or derivatives to hedge their own exposure.
US leveraged ETF assets top $256 billion
Morningstar Direct data shows there are 593 leveraged ETFs in the United States, with more than $256 billion in assets under management. Among them, 426 are single-stock leveraged funds, a category that regulators approved in 2022.
Hidden Road acquisition opened the door
Ripple moved into swap financing after acquiring Hidden Road, a prime broker focused on crypto hedge funds, last year. The business now operates under the name Ripple Prime. It is working with multiple ETF providers and wants to broaden the offering to other investment managers, including hedge funds.
On Tuesday, Ripple Prime said it will provide prime brokerage, clearing and financing services to hedge fund Brevan Howard. Noel Kimmel, president of Ripple Prime, said the business is a growing and meaningful part of the company.
Financing costs are separate from management fees
The report gave one example in which a fund pays Ripple an overnight bank funding rate plus 4 percentage points. As of Tuesday, that worked out to an annualized cost of about 8% of fund assets. That financing cost is reflected in the leveraged fund’s net asset value and is separate from a management fee of about 1%.
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