Citi halves swaptions book with US retail funds

Citi slashed the notional value of its swaptions portfolio with US mutual funds and exchange-traded funds (ETFs) in the fourth quarter of 2023, amid a broader retrenchment in non-vanilla rates volatility exposure between banks and asset managers.

Citi cut its swaptions book with mutual funds by 56% to $17.4 billion over the quarter, as the bank went from being the biggest provider of non-linear rates instruments to ’40 Act funds to just the third largest, Risk.net Counterparty Radar data shows.

Overall mutual fund and ETF swaptions exposures fell by 22% in Q4 to $131 billion in notional value, the lowest since the first quarter of 2021, when gross notional stood at $117 billion, as eight of the 10 largest users trimmed their books.

Morgan Stanley replaced Citi as the top provider of swaptions to mutual funds and ETFs in the quarter. The dealer’s portfolio grew 5% over the three-month period to $28.6 billion.

Goldman Sachs remained the second-largest swaptions counterparty for the space, despite cutting its book by 27% to $17.3 billion.

Along with Morgan Stanley, BNP Paribas and JP Morgan were the only other dealers in the top 10 to increase their over-the-counter rates volume footprint in Q4. Fourth-placed JP Morgan boosted its swaptions book by a third to $16.8 billion, while tenth-placed provider BNP Paribas grew 5% to $4.4 billion.

Bank of America’s non-linear rates vol book shrunk by a third to $9.3 billion in Q4.

Risk.net previously reported that Bank of America was one of three large US banks to slash derivatives notional in Q4, as banks looked to reduce systemic risk indicators ahead of year-end capital surcharge calculations. Citi and JP Morgan also made similar moves to cut derivatives notional.

Nomura leapfrogged Bank of America to fourth place for notional value of swaptions contracts with mutual funds, as exposure to the asset class fell 18% to $10.3 billion.

On the buy side, the declines were led by sharp reduction in swaptions exposure at BlackRock, Putnam Investment Management and Voya Financial.

BlackRock’s book fell 46% to $16.7 billion in Q4. It is likely BlackRock exercised its in-the-money swaption contracts over the quarter, given the notional value of the vanilla swaps held by the firm’s mutual funds and ETFs jumped by $20.9 billion in swaps, but had a $15 billion cut to the swaptions notional.

Putnam’s portfolio dropped 38% to $8.3 billion and the notional value of Voya’s swaptions portfolio plunged 71% over the same period.

Pimco’s swaptions book – which represents more than half of all US retail fund positions by notional value – fell 9% to $76 billion. Columbia Threadneedle cut its swaptions portfolio by 21% in Q4 to $5.2 billion.

At the opposite end, the notional value of swaptions reported by Invesco jumped 69% to $6.7 billion, bucking the wider trend of mutual funds cutting back exotic rate option exposures.

Goldman Sachs Asset Management was the only other investor to grow mutual fund swaptions exposure in Q4, with the notional value of its book increasing by 22% to $4.7 billion. 

About this data 

The information used in this analysis comes from Nport-P filings to the US Securities and Exchange Commission. This is a relatively new form, introduced at the end of 2019, which requires mutual funds and exchange-traded funds to file monthly summaries of their portfolio holdings to the SEC.  

The filings include over-the-counter derivatives trades that were live at the time of the filing, and show details such as bank counterparty names, currencies, trade sizes and remaining maturity.

The forms are filed to the SEC on a monthly basis, and the regulator makes the final filing of each fund’s quarter public 60 days after the end of that period. The filings are in a structured XML form, making it possible to download and parse the data for trends.  

It’s important to caveat the information. While these are pro forma regulatory filings to the SEC and should be accurate, mistakes and miscategorisations do occur. The data was cleaned and obvious errors excluded. 

Notionals for equity options are not included in the filings, so have been calculated independently by Counterparty Radar. This involved multiplying the reported number of contracts by the number of shares per contract, and then multiplying this figure by the strike price.

The resulting strike-adjusted notional may differ from funds’ annual or semi-annual reports, which often use the spot price at time of filing instead of the strike. We chose to use the strike price to allow for quarter-to-quarter comparability – otherwise notional amounts might change solely due to changes in spot prices. The methodology is based on feedback from market participants, but if you have any comments please contact us, using the details below.

As the database is updated and improved periodically, data presented may not mirror information published in previous stories. Each story reflects the most accurate representation of data at the time of publication. 

Information from these filings is the basis for the new Risk.net service, Counterparty Radar, which allows users to search the filings information themselves to discover the most popular dealers and most active managers for a range of OTC derivatives. We will track these stats every quarter, so please get in touch if something doesn’t look right, or to suggest other ways to present the data: michael.paterakis@infopro-digital.com