Ripple Enters Bank-Dominated Swap Financing
The Wall Street Journal reports that Ripple is entering the long-standing bank-dominated leveraged exchange-traded fund swap financing and has become a significant player in this business. The report describes it as a crypto payment company stepping into Wall Street territory.
Leveraged funds use derivatives like total return swaps to achieve target multiples, with banks or brokers selling contracts and charging fees, then buying stocks or derivatives to hedge. Ripple entered this business last year by acquiring the main broker for crypto hedge funds, Hidden Road, which has now been renamed Ripple Prime. It has partnered with several fund issuers and plans to expand to other investment managers.
On Tuesday, Ripple Prime announced it would provide prime brokerage, clearing, and financing services to hedge fund Brevan Howard. Ripple Prime President Noel Kimmel, who previously worked at Cerberus Capital Management and other Wall Street firms, stated that this business is growing and has become substantial.
According to Morningstar Direct, there are 593 leveraged exchange-traded funds in the U.S., managing over $256 billion in assets. Among them, 426 are single-stock leveraged funds, a category that was only approved by regulators in 2022. Non-bank institutions like Jane Street and Clear Street are also advancing in this area. Banks remain constrained by stricter risk-weighting rules, and many new issuers are startups lacking long-term relationships with banks.
Fees fluctuate based on benchmark rates, contract terms, and target exposures. A regulatory document shows that a certain leveraged fund pays Ripple fees based on the overnight bank financing rate plus 4 percentage points, which as of Tuesday annualizes to about 8% of the fund's assets. This cost is included in the net asset value, separate from the approximately 1% management fee. Holding for more than one trading day incurs swap costs, daily compounding, and volatility that can erode returns. An example fund has dropped 53% this year, while the underlying stock has risen 0.9% during the same period.
Swap providers also bear the risk of extreme daily volatility. If the underlying drops more than 50% in a day, it could wipe out the equity of the leveraged fund, leaving the counterparty exposed. Hedging typically requires trading with another group of asset managers or market makers.
Buyers are new funds and hedge funds lacking bank credit lines, while sellers include Ripple Prime, Jane Street, Clear Street, and still-dominant banks. Funds flow from the net asset value of the funds to the financing party, not into XRP. Non-bank counterparts that can offer higher swap fees benefit, while banks constrained by risk-weight limits struggle to accommodate new issuers' trading desks.
Source: Public Information
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Ripple originally focused on cross-border payments and XRP liquidity, announcing the $1.25 billion acquisition of Hidden Road in April 2025, which was completed in October and renamed Ripple Prime. In 2025, it also applied for a national bank charter from the Office of the Comptroller of the Currency, with the stablecoin RLUSD previously regulated by the New York Department of Financial Services. The strategy is to first acquire a prime brokerage desk and then integrate stablecoins, custody, and financing into the same client list.
The fees collected are from swap spreads, not token transaction fees. Funds pay fees based on the overnight rate plus 4 percentage points, annualizing to about 8%, plus approximately 1% management fee. After selling total return swaps, Ripple Prime must hedge by buying stocks or derivatives. A single-day drop of over 50% could wipe out a 2x fund's equity, leaving losses with the counterparty. Kimmel's background from Cerberus indicates they are hiring traditional financing desks, not on-chain market-making teams.
Similar positions include Jane Street and Clear Street. Banks are constrained by supplementary leverage ratios and risk-weighted asset limits, while newly issued single-stock leveraged funds lack established credit relationships. Among the $256 billion in assets and 593 products, 426 are single-stock funds that emerged after regulatory approval in 2022. Banks still hold the majority, while Ripple captures the incremental business that banks are unwilling to allocate capital to.
This represents a shift in pricing power from bank balance sheets to external parties. The leverage multiples remain unchanged, but the willingness to provide balances for daily reset swaps has shifted. Regulatory constraints limit banks' risk usage, and startup issuers cannot enter old credit lists, causing fees to flow from bank trading desks to non-bank prime brokers.
ABAB News · Cognitive Law
- Banks are relinquishing not clients, but risk usage.
- The returns of leveraged funds are first eaten away by financing costs.
- Acquiring a prime brokerage desk is faster than building credit from scratch.