Regulators have identified a trade in Deutsche Bank AG credit default swaps they believe fueled Friday’s global sell-off.
According to sources familiar with the matter it was a EUR5 million ($5.4million) bet on swaps tied the German bank’s junior bonds. Because the contracts are not liquid, a single bet could trigger large moves. Deutsche Bank spokesperson declined to comment.
The knock-on effect, which was suspected to be a rout, sent bank stocks plummeting, government bonds higher, and CDS prices for lender soaring. This resulted in Deutsche Bank’s market capitalization falling by EUR1.6 billion and an index tracking European banking stocks dropping by more than EUR30billion. Investors have been on edge ever since the collapse of several US banks, rescue of Credit Suisse Group AG and market searches for clues as to whether other lenders will also be under pressure.
European banks and regulators sought to emphasize that they are keeping a close eye on rising rates and that the sector is sound. The presentation by the German lender on Monday, amid the unwelcome attention, highlighted its “well-diversified portfolio” deposits. This was a key focus for investors after the collapse of Silicon Valley Bank. Deutsche Bank and the broader Index rebounded Monday, erasing some Friday losses.
“Investors view Deutsche Bank as one the higher beta names. So if you want to bet against weak sentiment then these kinds of names might be interesting,” Suvi Platerink Kosonen (a banking credit analyst at ING Groep NV) said.It is not clear who or why the relevant bet was placed. The people said that there is no evidence to suggest anything illegal about the trade. One person said that some data suggests that the trades were for hedging. One of the people also said that there was a transaction on Deutsche Bank’s five-year senior CDS contracts, which was executed on Thursday. This transaction attracted attention.
According to Bloomberg data, Deutsche Bank’s CDS contracts were most active. They included five-year, dollar-denominated swaps that are tied to senior debt. These swaps saw at least $51million notional during the period from Friday to Friday. This number could be higher as single trade data is limited to $5 million. Instead, the trading volumes for euro-denominated instruments totalled around EUR12million during the same period.
Andrea Enria (ECB’s top supervisor) highlighted Tuesday that the search for triggers highlights a lack of transparency in this asset class. He called on global financial regulators not to overlook the CDS market. Deutsche Bank’s top bank regulator is the European Central Bank, but this watchdog does not oversee securities trading. Market regulators are responsible for investigating any irregularities.
Enria stated that there are markets such as the single-name CDS market, which are “very opaque, very shallow and very illiquid.” He spoke at a conference hosted in Germany by Handelsblatt. He said that “with a few million, you can move CDS spreads of major banks” and “contaminate also stock markets and possibly even deposit outflows,” without naming any banks.