Often fluid. Not always liquid

This article is part of the Dealer Rankings 2024. You can find the overview article here, analysis of the top 10 dealers here and a detailed methodology here. 

Last year’s inaugural Dealer Rankings demonstrated there is no such thing as an interest rate swaps market, or a foreign exchange options market, or an index credit default swaps market. Not in the way a market is normally understood, as a place where a single group of buyers and sellers mingle. Rather, each client group – arguably each client – has its own market, served by its own pool of dealers, which it accesses in its own way, for its own distinct purposes.

This year’s second edition of the rankings shows how fluid these mini-markets are.

Take credit options as an example. Last year, US mutual funds and exchange-traded funds executed these instruments with 10 different dealers, and Barclays was the top dog, amassing 392 rankings points (we’ll get into points – what they mean and where they come from – later).

This year, funds traded with just eight dealers, and Barclays slid all the way to sixth, with a total of 166 points. That’s a radical change, with a simple, real-world explanation. The credit options business shrank significantly, as PGIM and Pimco, the market’s two top buy-side participants – and Barclays’ two top clients – shunned the product. The dealer that finished top of the credit options ranking table this year, JP Morgan, did so with 64% of the points Barclays had racked up a year earlier.

It’s the kind of thing that happens fairly regularly in the OTC derivatives business, but it’s also the kind of thing that was invisible to most observers – even to some participants – prior to the aggregation of this data from the quarterly filings of US funds and US life insurers. The rankings help to highlight these otherwise-hidden shifts of fortune.

Another example comes in interest rate swaps, where all participants have been weaning themselves off the scandal-hit Libor family of benchmarks – for US dollar trades, the replacement is the risk-free rate, SOFR. The first edition of the Dealer Rankings – capturing the early stages of this transition – found US life insurers using 14 dealers to execute their SOFR business, with Mizuho stealing a march on its US and European rivals. The Japanese dealer executed the largest number of tickets and amassed the largest book by notional.

It has not been able to hang on. This year, the number of sell-side counterparties exploded to 25, as SOFR volumes surged. Traditional rates heavyweights have mopped up more of this business, pushing Mizuho into a still-creditable sixth spot for book size, and fourteenth for tickets.   

The same kind of ebb and flow is in evidence throughout the rankings data but, in some cases, it needs to be interpreted carefully. For example, mutual funds and ETFs might be cheered to see a net increase in the number of dealers active in index CDSs – HSBC, present in last year’s rankings, vanishes from this year’s list, but has been replaced by two newcomers, in Societe Generale and Wells Fargo.

Each of these banks, though, was named as a counterparty by a single client – the French dealer for a single ticket, its US rival for four. Other dealers at the lower end of this particular rankings table also traded with a limited number of clients – UBS with two, BNP Paribas with three, Credit Suisse with seven (though only three of those traded more than five tickets). For fund managers that want to transact regularly, this year’s expanded list of 12 dealers is more realistically a list of seven or eight.

This is another fact that, until now, has existed mostly in the realm of anecdote.

So, how do the rankings work? As noted in all of this year’s articles, it’s important to read the full methodology – an abridged mini-methodology is available as part of this article.

But there are a few methodology – and jargon – points worth stressing. The underlying data for the rankings are quarterly disclosures from two groups of clients – US mutual funds and ETFs, and US life insurers. Those disclosures provide a point-in-time snapshot of the trades they have on their books, including the identity of the dealer counterparty for each position.

Our rankings are based on a cleaned and aggregated version of this data. In particular, the rankings make heavy use of the notional size of all positions that are attributed to a particular dealer (which we typically refer to as ‘book size’), the number of tickets executed by that dealer, and the number of clients that identify the dealer as a counterparty. We also look at these same three metrics – book size, number of tickets, number of clients – on a year-on-year basis. This creates six basic metrics.

These six metrics are then calculated for a variety of ‘cuts’ in the data for each instrument, with each client group. One cut will always be ‘all trades’. Others include trades with a large notional value, or a longer time to maturity, or specific, popular underlyings.

Every dealer that is active in these cuts is ranked for all six of our basic metrics – and points are assigned to each dealer, based on how many other dealers they finish above. So, more points are available in well-populated markets and sub-segments of these markets.

One consequence of this approach is that the dealer with the biggest existing business doesn’t always win. In fact, it can be hard for those dealers to win, because they may struggle to grow notional, tickets and clients enough to land near the top of those metrics. Often, the dealers that finish near the top of the rankings are those that start with a big footprint, and also display good year-on-year momentum.

This is a feature of the rankings methodology, not a bug. In our analysis, though, we do often distinguish between what we call ‘gross points’ – those gained from rankings of book size, tickets and clients – and ‘increase points’ gained from year-on-year growth in those metrics. You’ll see those terms appearing frequently below.

INTEREST RATES

Interest rate swaps

Mutual funds and ETFs: Citi topped the rankings this year, having placed sixth in 2023. When looking at all trades by notional, Citi was the fourth-biggest dealer, but it executed more tickets than any other bank, had the second-biggest client list, and was also second for year-on-year growth in notional, tickets and clients.

A second entrant into the top five is Barclays, mirroring Citi’s five-place jump to finish third. Although not so strong on gross points, it gathered more increase points than any other bank, with particular growth in tickets and clients.

Only UBS managed a larger jump – from thirteenth to seventh – some of which could be attributed to Credit Suisse’s accompanying slide from fourteenth to eighteenth.

Last year’s winner, Bank of America, fell to fifth spot. The rankings methodology – awarding points for notional, tickets and clients, and separately for year-on-year growth in each of those metrics – does make it harder for dealers to retain their title. It is clearly not possible to outgrow all of your rivals every year.

There was some shrinkage in the number of counterparties active in this market – 21 dealers were named in mutual fund filings during 2023, down one from the prior year. And the same was true in specific segments: funds traded with 12 dealers in Americas currencies, down from 14.

Greater counterparty choice was seen in SOFR-linked swaps – 14 dealers were used, up from 12 – and in long-dated trades, where nine dealers were active, up from just four in the prior year.

Life insurers: BNP Paribas surged to first position in the US life insurer space, up from ninth last year – the largest change in the rankings in any individual instrument. Year-on-year comparisons in the insurer segment are complicated by the fact that increase points were not possible to calculate last year, so the prior year’s positions were based on book size, tickets and clients only.

A look at the underlying cuts of data shows the French dealer leading the pack for growth in the size of its book of very long-dated trades, and in its client roster for those trades, as well as in cuts relating to fed funds-linked swaps and Euribor swaps.

The only top five dealer from last year that managed to improve on its position was Citi, which moved from fifth to third. While being stronger than BNPP and Wells Fargo on gross scores, it lost ground on increase points.

The number of dealers competing for life insurer business increased to 29 – up one from last year – and there was a huge expansion in the number of dealers active in SOFR-linked swaps. Last year, only 14 dealers were named as counterparties, with Mizuho top for book size and tickets. This year, the business has clearly taken off – 25 dealers were active, pushing Mizuho back into sixth spot for book size and fourteenth for tickets.

Inflation swaps

Mutual funds and ETFs: Morgan Stanley rose through the ranks to take first position, up from fourth, displacing incumbent JP Morgan. The bank collected most of its points from the depth of its client list – both the gross number and year-on-year increase – where it placed first three-quarters of the time.

Barclays moved to fourth spot, up from eighth, becoming this year’s sole non-US representative in the top five. As with Morgan Stanley, its strongest area was unique clients.

HSBC, last year’s European representative, disappeared from the rankings completely, leaving mutual funds with just seven dealer counterparties.

Sub-segments of the market have even fewer dealers. Only six banks executed trades with a remaining maturity of more than 10 years, only three were used for trades linked to eurozone inflation, and only one – Goldman – for UK inflation.      

Life insurers: Citi jumped into first place, from third. Last year’s top dealer, Deutsche Bank, slipped to second. For the new leader of the inflation pack, unique clients were its strongest suit, where it placed first in 95% of the different cuts of data.

The biggest jump in the rankings belonged to Bank of America, though, which joined the top five in third spot, up from seventh in last year’s data. The bank was hard on the heels of Citi in many category cuts, sharing first place in many of the client-focused cuts.

Credit Suisse dropped the most, falling from fourth to eighth spot, though still ranking higher than UBS, which stayed outside the top 10.

Dealers overall gained more points this year, with many showing up more regularly in the market’s various cuts. Last year, only four of the 15 active dealers appeared in more than 20 gross cuts. This year, nine dealers beat that threshold. 

Swaptions

Mutual funds and ETFs: Morgan Stanley and JP Morgan both climbed two places, finishing first and second, respectively. Most of Morgan Stanley’s points were accumulated in client cuts, while JP Morgan’s principal strength was in ticket count, where it ranked first seven times, compared to only two firsts for Morgan Stanley.

Barclays leaped into third, from tenth last year. The UK dealer competed in all of the same cuts as the top two dealers, but was absent from swaptions referencing Japan’s Tonar rate.

As with interest rate swaps, the overall points racked up by dealers contracted when compared to last year – none beat the 500-point mark. That is a sign that fewer dealers were competing in the market’s various cuts, or that the leading dealers were less dominant. In last year’s data, Goldman Sachs and Citi both sailed past the milestone.

As with interest rate swaps, competition for SOFR-linked swaptions increased. There were 13 dealer counterparties this year, versus 11 last year – Mizuho and TD securities were the new entrants.

Life insurers: Morgan Stanley’s good swaption fortunes were not repeated in the life insurer space, where the dealer had the largest drop of all, falling from third to tenth spot. Despite a respectable gross score, Morgan Stanley had the third-worst increase score – placing last in more than half the cuts, with client numbers its weakest area.

Deutsche Bank, on the other hand, muscled its way into first spot, making it the only European dealer to finish in the top five in both editions of the rankings. The bank’s strongest areas were book size and growth in book size, where it was first almost 70% of the time.

Following the pattern of the mutual fund space, the overall scores dealers attained were lower this year. To illustrate, Deutsche’s gross score, the highest this year, would have earned it only fourth place in 2022.

Repo

Mutual funds and ETFs: Last year’s top two dealers, BNP Paribas and Bank of America swapped places, with Bank of America now in the lead. Ticket count was its strongest suit, where it placed first over half the time, followed by unique clients, where it ranked first just under half the time.

Citi managed to vault into the top five thanks to a five-spot increase, landing in third. Unique clients were Citi’s best area, where it could generally be found in the top five, and was never out of the top 10. In the book size cuts, Citi was mostly in the top 10, but it could also be found as low as 18. For tickets, its worst placing was 26.

JP Morgan slipped from third to ninth, primarily due to a weak increase score. Whereas last year it was twelfth for increase points – the weakest of the top five dealers – this year it was twenty-fifth, giving it one of the weakest hauls for growth among the top 20 dealers.

The repo space continues to feature the largest line up of dealers among all instruments, and participant numbers swelled to 42 this year, thanks to three new entrants – Jefferies, Bethesda Securities, and ICBC. Towards the end of the year, the Chinese bank was the victim of a cyber attack that – because of its role as a repo intermediary – disrupted the US Treasury market.

Dealer numbers vary considerably by collateral type, though. A total of 35 banks were named as counterparties for US Treasury repo transactions – with BNP Paribas and Bank of America splitting the available first places between them. For trades with CDS collateral, there were 29 dealers; for AMBS there were 25; for PLCMO there were 17, and for EQT just 10. National Bank of Canada led four of the six EQT cuts. 

FOREIGN EXCHANGE

FX forwards

Mutual funds and ETFs: All change in the forwards rankings. The top five in this market is barely recognisable from last year’s line-up, with only UBS and Barclays carrying over. BNP Paribas jumped five spots into first, cementing a triumvirate of Europe, the Middle East and Africa dealers at the top. Goldman Sachs rocketed up 12 rungs to fourth, and Bank of America moved up to fifth, from eighth.

Looking at the underlying cuts, it’s not immediately obvious BNPP would end up first. For book size, the French dealer could mostly be found in the top five; in tickets, it mostly in the top seven; in clients, mostly the top 10.

When compared to its two closest competitors the picture becomes a little clearer. Barclays’ scores are also broadly distributed, the bank being arguably strongest of the top three in unique client cuts, but weakest on notional – in other words, it seems to have more clients, who execute smaller trades. Meanwhile UBS’s notional scores are even better than BNPP’s, but the Swiss dealer is the weakest of the three on tickets.

In such a competitive environment – where funds traded with a total of 37 dealers – no bank can dominate. The winning formula is to match the competition in as many cuts as possible, and stand out in some of the more populous ones.

To illustrate, cuts for the five most popular underlyings have four different dealers leading the way for book size – State Street for euro, TD Securities for yen and Canadian dollar, HSBC for sterling, UBS for Australian dollar.

JP Morgan had the largest drop out of the top five dealers from last year, sliding seven spots to ninth. As with the repo market, it was weak on increase scores – only dealers outside the top 30 scored fewer points for year-on-year growth.

Life insurers: The life insurer market saw similar turnover at the top of the rankings, with only two dealers clinging on to top five spots. Morgan Stanley kept its victor’s crown, one of only two markets where this happened, while Societe Generale climbed three rungs to second.

Separately BNP Paribas, JP Morgan and Royal Bank of Canada all muscled into the top five, ensuring the market continued to be led by two US dealers, two European dealers, and a Canadian one.

The deposed members of last year’s top five – Barclays, CIBC and Citi – still posted healthy gross scores, but increase points were their Achilles’ heel.

The forwards market for insurers is served by fewer dealers than its mutual fund counterpart – 24 in total – and the pool of counterparties shrank slightly in some cuts. For example, insurers named 14 dealers in Swedish krona trades this year, down from 17 last year. The list of Canadian dollar counterparties fell by three, to 18, while there was one fewer Australian dollar dealer. Insurers also turned to one fewer dealer to execute trades with a notional in excess of $500 million – Wells Fargo disappeared from the list.

FX options

Mutual funds and ETFs: Bank of America ousted JP Morgan from last year’s top position. Both banks go toe-to-toe in the different cuts, with JP Morgan having an edge in gross points. However, Bank of America pulled ahead on increase scores, and secured several first places in some of the market’s most popular underlyings – Mexican peso, Brazilian reais, and yen.

Two new European dealers entered the top five – BNP Paribas and Deutsche Bank – both earning over half their points in increase cuts, and grabbing the biggest totals among the top five dealers. BNP Paribas had the largest rank increase, moving from eleventh to fourth, thanks in part to strength in longer-dated options, where it took first place for all six cuts – book size, tickets, and clients, as well as year-on-year growth in each.

Three new dealers entered the market, TD Securities, Crédit Agricole and Bank of Montreal, all placing outside the top 10. In total, funds executed their trades with 19 different dealers – a net increase of two since last year, because Credit Suisse vanished from the market. UBS appears not to have mopped up its compatriot’s clients, because it also lost ground.

CREDIT

Index CDSs

Mutual funds and ETFs: In an unusual swap of positions, Bank of America secured the first spot, having gained five places, whereas Goldman Sachs slid into sixth, having lost five. The remaining top five dealers remained the same, though their specific order was reshuffled a little.

Looking at the underlying cuts, Goldman dominates on gross points, almost never placing outside the top three, compared to Bank of America which is usually third to sixth. For increase points the roles are reversed, with Bank of America securing a series of firsts, particularly in tickets and unique clients, while Goldman ranked fifth or lower three-quarters of the time.

For mutual funds that are hoping for more competition, it was a case of two steps forward and one back – Wells Fargo and Societe Generale entered the market, while HSBC dropped out, taking the total number of dealer counterparties to 12. The Counterparty Radar tool shows that both banks executed a small number of tickets with a single client.

Life insurers: Morgan Stanley cemented its first position with both the strongest gross and increase scores of all the participants, echoing its achievement in the FX forwards market for insurers. The bank amassed 27% more points than its nearest rival, Citi, and was particularly strong in book size and client roster scores. It was also the sole active dealer in two sub-segments of the market – trades above $500 million, and trades referencing the CDX NA HY index.

Citi improved slightly on its gross score from last year – generally placing third across the cuts, whereas previously it was third to fourth – but was really propelled by strong increase scores.

Barclays was named as a counterparty for index CDSs this year, bringing the total number of dealers up to eight. The only other non-US dealers – BNP Paribas and Nomura – are, like Barclays, placed outside the top five, leaving this market in the hands of the big US dealers.

Single-name CDSs

Mutual funds and ETFs: The single-name CDS market sustains more dealers than its index counterpart. There are a total of 14 banks active – compared to 12 for the index product – with HSBC continuing to be involved in single names, despite dropping out of the index space. The opposite is true for Societe Generale, which joined the index CDS market this year but did not make an appearance in single names.

Other dealers that are active in single names but not indexes: Standard Chartered, and a rare appearance in the credit markets for a US regional, US Bank. But the list of dealers shrank by two year-on-year, with no funds now naming BNY Mellon and UBS as counterparties.

At the top of the chart, Citi jumped four spots, from fifth to first. JP Morgan climbed five places, from seventh to second.

Last year’s top two – Morgan Stanley and Bank of America – slumped to fourth and seventh, respectively. Morgan Stanley continued to have the third-largest haul of gross points, but its increase points total was better than only two other dealers.

Barclays is the dealer with the largest gross points haul – it is second only to Citi for book size and tickets for all trades, has the joint-third longest client list, and leads many of the cuts for the market’s top sovereign underlyings.

“There’s no surprise about the top three,” says the head of trading at one large mutual fund manager. “Personally, I might have expected to see Barclays at the top, but they’re all pretty close.”

The top underlyings in the single-name space for mutual funds and ETFs this year were all sovereigns – South Africa, Mexico, Colombia, Turkey and Brazil. In these names, Barclays and Morgan Stanley were the dealers with the biggest books, while Bank of America, BNP Paribas, and Barclays (again), led the cuts for year-on-year book growth.

Life insurers: Goldman Sachs took first place this year, up from fourth in 2022, with its success underpinned by the joint-strongest gross score (it tied with Citi), and the fourth-best increase score. The depth of its client roster was a particular strength, where the bank placed first in swaps under 10 years, all trades under $500 million, and in both SSA- and corporate-referencing swaps.

Bank of America had the largest haul of increase points, helping it move from sixth to second position. It was top for year-on-year growth in book size for all trades, for trades under $500 million, and for all trades with US dealers. It also outgrew many rivals in the most popular underlyings.

Like mutual funds and ETFs, the market’s most popular underlyings were dominated by sovereign names – but not completely. US insurers were also heavy traders of General Electric, with three dealers acting as counterparty. And their choice of sovereign names was somewhat different to the funds – Indonesia and Peru joined Brazil and Mexico.

JP Morgan fell five spots to seventh, having been overtaken in one of its prior strong points – its client roster – but also weakening somewhat in notional and ticket count.

The market contracted to 11 banks, having lost Wells Fargo and Societe Generale.

Credit options

Mutual funds and ETFs: JP Morgan moved from sixth place to first. The bank had the fourth-biggest haul of gross points, but its increase total was only bettered by BNP Paribas.

Last year’s top dog, Barclays, slid to sixth spot after losing major ground in various cuts relating to book size. In the prior year’s data, Barclays topped the book size cuts roughly three-quarters of the time, but in the new rankings it was mostly fifth. Counterparty Radar shows the UK dealer’s biggest clients in 2022 – PGIM and Pimco – dramatically cut their activity in 2023, with their remaining business going primarily to Citi.

The exit of Wells Fargo and Credit Suisse left only eight dealers active in this market during 2023.

EQUITY

Equity index options

Life insurers: Goldman Sachs climbed from sixth spot into first, thanks to the strongest increase score in the market and the second-largest gross score. On increase scores, Goldman performed strongly across the board, placing first or second in 80% of the cuts. In gross scores it was strongest in notional categories, where it placed first half the time.

This result is no surprise to one veteran buy-side trader, who highlights Goldman’s roots in the market: “Back in the day, First Options of Chicago was the top prime broker that you could use. They were bought by Spear, Leeds & Kellogg, which in turn was bought by Goldman Sachs – and ever since, Goldman has just been a powerhouse in options trading,” he says. 

JP Morgan surged to second spot from eighth, the biggest position gain in this market. While nudged into second by Goldman in many cuts, it went toe-to-toe in book size growth and in client growth.

At the other end of the spectrum, Credit Suisse suffered the largest drop, seven places, leaving it in eleventh spot. Although still hauling in a respectable amount of gross points, the Swiss bank was unsurprisingly weak for year-on-year growth, collecting almost 40% fewer than its acquirer UBS, which leapfrogged Credit Suisse to enter the top 10.

No dealers left the market this year, while Mizuho and US Bank joined the fray. The latter’s arrival means there are now two US regionals in the market – Truist is also present, with a client list of 13 insurers, according to Counterparty Radar. The Charlotte-headquartered bank placed fourteenth overall, but equal twelfth with BNP Paribas when ranked by increase points.

Editing by Duncan Wood