CMBS Total Return Swaps

Abstract

The total return swap market has been a key financial market innovation to control risk or to enhance returns. For commercial mortgage-backed securities (CMBS), several dealers offer total return swaps on various CMBS indexes and their subsectors. The authors discuss the mechanics of these CMBS swaps and the economic rationale as to why the market has offered attractive terms to those who want to gain exposure to the CMBS sector, while eliminating the idiosyncratic risk between a CMBS cash portfolio and the CMBS indexes.