Citigroup Joining JPMorgan, Goldman in a Growing Swaps Business

Citigroup Inc. is the latest Wall Street bank to try to make money off the declining liquidity in the debt markets by selling a type of derivative increasingly used to wager on corporate bonds.

The U.S. lender has expanded its offerings of so-called total-return swaps to cover investment-grade debt over the past few weeks, according to two people familiar with the matter, who asked not to be identified because they’re not authorized to speak about it. In December, Citigroup started selling TRS linked to Markit Group Ltd.’s high-yield bond index.

“TRS is a natural extension of the derivatives products suite we offer to our clients,” Citigroup spokeswoman Danielle Romero-Apsilos said.

The derivatives appeal to investors because they’re designed to make it easier to bet on debt as trading in the credit markets has become increasingly time consuming and expensive with liquidity drying up. Dealer inventories are declining as regulations introduced to reduce risk-taking deter banks from holding the large positions needed to effectively make markets.

Trading in TRS is still in its infancy, but investor demand has been growing at a healthy rate since August, Citigroup credit-derivatives strategist Anindya Basu wrote in a February report. Volume has grown, increasing from about $1.5 billion last March to $6.6 billion in December, according to estimates in the report. The upward trend in trading in the second half of last year shows investors are warming to the product, he said.

Joining Competitors

In a total-return swap, buyers pay the London interbank offered rate and get paid if the bond index price rises over the period of the contract. Sellers receive Libor-plus-income if the bond index price declines.

Citigroup became the eighth dealer in the derivatives, joining fellow U.S. finance firms including Goldman Sachs Group Inc., Bank of America Corp., JPMorgan Chase & Co. and Morgan Stanley, according to Markit. BNP Paribas SA, Credit Suisse Group AG and Deutsche Bank AG are also dealers.

Mark DeSplinter and John Mann head the index trading team, which also handles the total-return swaps, the people said.

While total-return swaps have been around for years, trading derivatives linked to Markit’s iBoxx bond indexes has increased since standardized contracts were created in June 2012. After the market started electronically confirming swaps in March 2015, a monthly average of $5.3 billion of contracts linked to indexes in Europe and the U.S. were bought and sold, with $5.7 billion trading hands in February, according to Markit.

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