Deutsche Bank Plans Return to Key Part of CDS Market

  • German lender will trade cleared swaps, people familiar said
  • Bank exited most single-name swaps trading three years ago

Deutsche Bank AG plans to return to a corner of the credit derivatives market that it largely exited about three years ago, according to people with knowledge of the matter.

The German lender told clients that it plans to start making markets in some credit-default swaps tied to individual companies, said the people, who asked not to be identified because the information isn’t public. The bank will buy and sell contracts that settle through a clearing house and plans to start as early as the second quarter, they said.

Paul Huchro, who oversees investment-grade trading globally along with high-yield debt in Europe and the U.S., is leading the effort, one of the people said. Deutsche Bank hired the former Goldman Sachs Group Inc. partner out of retirement last year.

A spokesman for Deutsche Bank in London declined to comment on its plans.

2014 Exit

Deutsche Bank said in late 2014 it would stop trading most single-name credit swaps, which had become costlier because post-crisis regulations required lenders to hold more capital. It cut traders and sold most of its positions, though it continued to trade swaps tied to emerging-market borrowers and distressed companies, along with the more active markets for credit derivatives indexes and corporate bonds.

The planned return to single-name swaps trading comes as Deutsche Bank’s Chief Executive Officer John Cryan seeks to inject new life into Europe’s largest investment bank after revenue fell to the lowest in seven years. He’s planning a return to growth in 2018 after years of scaling back risk, improving controls and settling legacy misconduct cases.

“They cut too deep and now they need to grow revenue,” said Sean George, Deutsche Bank’s former head of investment-grade credit swaps trading, who left the lender in 2011 and is now chief investment officer at hedge-fund manager Strukturinvest AB in Stockholm. “They left revenue and market share in the credit markets on the table without a CDS business; it’s a big hole for the franchise. Historically, it has been a big profit generator and there’s no reason why it can’t be so in the future as well.”

Among measures that regulators enacted after the crisis is requiring large swaths of credit swaps to be backed by clearing houses, which are capitalized by banks and require traders to set aside collateral, or margin, to cover losses if they can’t make good on the transactions. Clearing of credit indexes is obligatory and investors including BlackRock Inc. and Pacific Investment Management Co. have advocated also clearing single-name swaps.

Credit-default swaps are derivatives used by hedge funds, banks and institutional investors to protect against losses or to speculate on the ability of borrowers to repay their debts. More than 80 percent of the credit-default swaps market is centrally cleared, according to the International Swaps & Derivatives Association.

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