Wells Fargo Said to Expand in Credit Swaps as Clients Hedge

  • Bank plans to trade the derivatives as soon as next quarter
  • Investors are increasingly eager to short, hedge credit

Wells Fargo & Co. plans to ramp up trading in derivatives that allow investors to bet against companies’ debt, the latest sign of growing interest in a market that many had abandoned.

The bank expects to trade credit-default swaps tied to individual companies as soon as next quarter, according to people with knowledge of the matter. Investors have grown more interested in betting and hedging with the instruments since the middle of last year, when corporate bonds started weakening.

Jessica Ong, a spokeswoman for Wells Fargo, declined to comment.

The revival in investor demand comes after years of decaying trading volume for the derivatives. As economic conditions improved in the wake of the crisis, defaults plunged, bond prices jumped and fewer money managers saw much to gain from betting that companies or countries would struggle to pay their obligations.

In 2014, Deutsche Bank stopped trading credit-default swaps on individual companies’ debt, a step that spurred investors and dealers to consider ways to jump-start the market again.

Wells Fargo plans to trade single-name credit swaps that are backed by a central clearinghouse, which would lower its transaction costs. In December, more than two dozen investment firms including BlackRock Inc. and Pacific Investment Management Co. announced plans to voluntarily clear the instruments to help revive the shrinking market. Swaps tied to indexes are already centrally cleared. Processing transactions through central clearinghouses cuts costs for market participants and is meant to make the financial system safer.

Last year, Stifel Nicolaus & Co. began trading cleared swaps tied to indexes and companies, two people with knowledge of the matter said. Ken Griffin’s Citadel is also expanding into credit-default-swap trading for other investors, starting with indexes.

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