Deep Dive: The Role of Total Return Swaps and Portfolio Swaps in GME Price Cycles

Initial Theoretical Doubts: The author initially questioned the T-21 and T-35 price movement theories regarding GameStop (GME). The primary skepticism stemmed from the improbability of multiple short funds aligning their trades and Fails to Deliver (FTDs) on identical dates, rather than spreading out the risk of buying in throughout a month.
Influential Research: The post acknowledges the work of u/criand, specifically the posts "Are futures or swaps the secret sauce to price movements?" and "The Puzzle Pieces of Quarterly Movements."
The Visualization Breakthrough: A plot shared by u/criand titled "GME Quarterly Price Movements and Equity Total Return Swaps" suggested that cycles are driven by derivatives settlement deadlines. These cycles are predictable and have demonstrated increasing volatility over time.
Core Thesis: The massive short positions on GME since January 2021 have been hidden within Total Return Swaps (TRS) and Portfolio Swaps, essentially packaging "meme" stocks into toxic debt bundles similar to the financial structures of the 2008 crisis.

Definition of Total Return Swap: A financial agreement between two parties. Party A (the payer) pays an ongoing fee to Party B (the receiver) in exchange for the total return of an underlying asset (such as GME equity). This allows for synthetic long or short exposure without the need to own the physical shares.
Incentives for Use: Swaps are preferred over traditional short borrowing due to lower margin requirements and the lack of detailed public reporting requirements (loopholes).
Insights from Professor Michael Greenberger: * TRS are the same instruments responsible for the 2008 global financial collapse. * Post-Dodd-Frank regulations were intended to make TRS transparent with strict capital and collateral requirements; however, these are largely ignored. * While rules dictate that margin should be collected twice daily, this practice is not consistently enforced.
The "Deguaranteeing" Loophole: Wall Street banks circumvent US regulations by deguaranteeing their foreign subsidiaries. This allows them to move Swap deals offshore (e.g., to London, Japan, or Berlin) to operate under zero US regulatory oversight, even if the deals were negotiated on Wall Street.
The Minsky Moment: A term referring to a sudden, major collapse of asset values following a period of extreme speculation and unhinged greed.

Cost of Leverage: The cost to hold a Swap contract is typically the LIBOR rate plus a "spread" to cover administrative costs for the prime broker.
LIBOR Rate Trends: * 2019: Approximately $3\%$ . * August 2021: Approximately $0.2\%$ . * This collapse in rates allows hedge funds to maintain massive synthetic short exposure at a negligible cost.
Case Study: Credit Suisse and Archegos: The Credit Suisse report on the Archegos collapse reveals that Archegos consistently breached internal risk assessment checks from July 2020 until their collapse in March 2021. Despite these breaches, the prime broker (Credit Suisse) repeatedly extended leniency.
Swap Reset Deadlines: While Swap agreements can last from 6 months to 5 years or more, they typically require intermediate "reset" or settlement dates every quarter. These quarterly resets are hypothesized to be the primary drivers of GME's cyclical price movements.

Portfolio Swap Mechanics: These are wrappers containing multiple Total Return Swap agreements. They allow prime brokers to package various synthetic short positions into a single instrument on their books.
Inherent Risks: Legal definitions of Portfolio Swaps often mention that they contain inherent leverage and "Put Option exposure." This suggests that deep Out-of-the-Money (OTM) puts may be linked to these swap structures.
Archegos Connection: Archegos suffered a trading loss exceeding $10\,\text{Billion dollars}$ (one of the largest in history) shortly after the GME price runs in January and March 2021. It has been confirmed that their collapse was partly due to GME swap exposure.
Hypothesis: Multiple "meme stocks" were bundled together into Portfolio Swaps to hold bad debt for short sellers, leading to the high correlation seen across these tickers.

Correlation Methodology: The author analyzed GME and 5 other stocks using daily close data from January 15, 2021, to August 15, 2021.
Correlation Findings: * GME showed high correlation (above $0.5$ to $0.6$ ) with stocks referred to as "movie stock," "headphone stock," and "express-thingy." * A correlation above $0.5$ over a 6-month period indicates the stocks are moving together consistently.
Rolling Correlation (28-Day Windows): * Pre-2021: GME did not correlate consistently with other meme stocks (random/wiggly data lines). * Early 2021: Almost all meme stocks began to move in high correlation with GME simultaneously. * Consistency: This correlation has remained strong for over 6 months, which should not occur in a free market with independent price movements.

Model Construction: A linear model was built to predict GME's price based solely on the movements of other meme stocks.
Predictive Power: The model achieved an $R^2 = 0.73$ . This means that $73\%$ of GME's price variance can be predicted just by looking at other meme stock prices.
June Run-Up Discrepancy: * The model predicted GME should have reached $\$400$ during the June run-up based on the performance of other meme stocks. * Actual GME price was lower, suggesting possible suppression (potentially linked to GME's share offering at that time) or an unusually high "bounce" in the other stocks.
Conclusion on Suppression: The model's overestimation of the price trend (after mean centering) suggests GME's price fluctuations closely mirror the basket, but the absolute value may be suppressed.

Timeline: The "death-spiral-swaps-cycle" appears to have originated in early January 2021.
Mechanism: Price movements are likely driven by prime broker hedging of Portfolio Swaps and their associated quarterly contract reset dates.
Regulatory Status: Wall Street continues to sidestep 2008-era protections by utilizing offshore facilities to hide toxic debt.
Questions & Discussion: The author asks the community if a specific new rule or event occurred on January 1, 2021, that might have triggered this shift into Swaps, or if the transition occurred simultaneously with observed "options fuckery."