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Barclays Agrees to Offload Derivatives Contracts to JPMorgan

  • Bank accelerating disposals of unwanted assets under new CEO
  • Portfolio consists mainly of rate swaps, person familiar says

Barclays Plc agreed to transfer a portfolio of derivatives contracts to JPMorgan Chase & Co., as the U.K.’s second-largest bank speeds up the sale of unwanted assets to reduce its capital requirements.

The portfolio consists mainly of interest-rate swaps, many of which are backed by collateral that will transfer to JPMorgan, according to a person with knowledge of the terms of the deal, who asked not to be identified because the information isn’t public. Rates swaps are usually classified as less risky and capital consumptive than equity or credit derivatives.

Barclays Chief Executive Officer Jes Staley, 59, was hired last year with a brief to accelerate disposals of assets, such as derivatives and leveraged loans that have high capital requirements, to help restore profit growth. While the size of the transferred portfolio wasn’t disclosed, derivatives accounted for half of the risk-weighted assets in Barclays’s non-core division.

“The transaction continues the strong progress being made with the rundown of non-core, in line with Barclays’ strategy of reallocating its resources where better returns can be generated and unlocking value for its shareholders,” the lender said in a statement Wednesday.

Seek Consent

Barclays will contact customers affected by the portfolio transfer this year and will need their consent before they can be moved to JPMorgan, the London-based bank said. JPMorgan, which had more than $37 trillion in notional interest-rate derivatives at the end of September, said it will gain access to additional European trading clients.

“Integrating this portfolio into our own business reiterates our commitment to the broader fixed-income markets and creates the opportunity for us to work with a wider range of clients over the long-term,” JPMorgan said in an e-mailed statement.

JPMorgan’s large derivatives portfolio offers the opportunity to offset the new positions with previously held trades, reducing the capital impact. The transfer won’t affect the U.S. firm’s minimum capital requirement under rules for global systemically important banks, said the person. JPMorgan has taken steps to reduce its minimum capital ratio to 10.5 percent from 11.5 percent when U.S. regulators first proposed the new rules in 2014.

Bad Bank

In 2014, former Barclays CEO Antony Jenkins set up a bad bank to dispose of 115 billion pounds ($167 billion) of risk-weighted assets, including parts of its fixed income, currencies and commodities, as well as derivatives, businesses. Run by John Mahon and Harry Harrison, the target is to cut assets at the non-core unit to 20 billion pounds by 2017.

Barclays had 27 billion pounds of risk-weighted assets in derivatives in the non-core unit as of Sept. 30, according to its latest earnings statement. The bank has also disposed of parts of its European consumer business, including Spain and Portugal, from its non-core unit, and in December sold 500 million pounds of private-equity-backed U.K. leveraged loans to Ares Management LP.

British lenders are under regulatory pressure to shore up their capital buffers and expunge risky or toxic assets from their balance sheets. Barclays’s common equity Tier 1 capital ratio, a measure of financial strength, was at 11.1 percent in the third quarter, the weakest among the U.K.’s five biggest banks. 

CEO Staley is due to present a broader strategic update alongside the bank’s full-year results on March 1.

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