JPMorgan, Goldman Said to Discuss Buying Deutsche Bank Swaps

Updated on
  • Lender looking to complete sale of $1.1 trillion swaps book
  • Deutsche Bank has sold about two-thirds of book since 2015

Deutsche Bank AG, the lender exiting some trading operations, is in talks with JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. to sell the last batches of about 1 trillion euros ($1.1 trillion) in complex financial instruments, people with knowledge of the matter said.

Deutsche Bank, based in Frankfurt, has sold about two-thirds of the portfolio of uncleared, mostly single-name credit default swaps since last year and wants to sell the rest within the next few months, according to the people, who asked not to be identified as the talks are private. The three U.S. banks have already purchased some of the instruments, the people said.

Deutsche Bank is withdrawing from countries, dumping unprofitable clients and pulling out of businesses as co-Chief Executive Officer John Cryan, 55, tries to boost profit and meet tougher capital rules after starting in July. He inherited a plan by his predecessor, Anshu Jain, to stop trading most credit default swaps tied to individual companies after new banking regulations made them costlier.

“It’s all about capital and leverage,” said Chris Wheeler, a London-based analyst at Atlantic Equities LLP. “Cryan clearly feels it’s not a profitable business, given the need to provide more capital under new regulations.”

Spokesmen for Deutsche Bank, JPMorgan, Goldman Sachs and Citigroup declined to comment. JPMorgan was among banks in talks to purchase more than $250 billion of the swaps, while Citigroup had already bought almost $250 billion, Bloomberg News reported in October.

Deutsche Bank’s portfolio of swaps had a gross notional value of about 1 trillion euros when it began sales last year, the people said. That measure includes long and short bets and doesn’t account for offsetting contracts.

Shedding Risk

Before Deutsche Bank began the sales, the swaps had a leverage exposure -- a metric that regulators use to measure a bank’s capital requirement -- of about 100 billion euros under the latest rules, one of the people said. The lender said in April that it would shrink the leverage exposure of its investment banking and trading unit by as much as 150 billion euros through 2018.

Credit-default swaps are insurance contracts that pay out if a borrower defaults on a debt. Investors use them to speculate on the borrower’s ability to repay debt or to guard against losses on the debt. The instruments helped to fuel the 2008 credit crunch and regulators have been trying to make them safer and less opaque.

Swap Shopping

Deutsche Bank’s swaps are uncleared, meaning that investors trade them directly with each other rather than through one of the clearinghouses that are mandatory for many trades after the crash. Europe’s biggest banks will need billions of dollars to meet new rules for collateral that they must set aside when trading uncleared swaps, regulators said this week.

The swaps are mostly “single-name,” meaning that they’re tied to individual companies’ creditworthiness, as opposed to an index of securities, one of the people said. Deutsche Bank stopped trading these instruments in late 2014, the lender said then. The total size of the credit derivatives market has dropped by almost two-thirds from $33 trillion in 2008, according to the Depository Trust & Clearing Corp.

As Deutsche Bank pulls back, other lenders are getting in, seeking to profit from a rebound in activity based on investors’ fears of rising corporate defaults and instability in global markets. Trading in single-name swaps doubled over a four-week period earlier this year, and Wells Fargo & Co., the third-biggest U.S. bank, plans to increase its dealings of the securities through clearinghouses, people familiar with the matter said this week.

— With assistance by Michelle Davis, Steve Dickson, and Sridhar Natarajan

(Adds analyst comments in fourth paragraph.)
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