PGIM chops CDS book as others bulk up

Counterparty Radar: The firm’s shrinking single-name book pushed Bank of America and Citi down the rankings

PGIM-cuts-CDS-positions

  • PGIM reported a big drop in single-name credit default swap positions – in particular, a handful of sovereign names – during a quarter when other large managers were adding to their books.
  • HOW THIS HAPPENED: PGIM’s Total Return Bond Fund shed $2.1 billion in sovereign CDSs, accounting for a majority of the manager’s decreased single-name book. Bank of America and Citi were counterparties to many of these trades and saw their total positions with US funds fall as a result.
  • WHY IT MATTERS: It stands out when compared to other managers. Of the six managers with the biggest single-name books, PGIM was the only one to cut. While PGIM was shrinking its Mexico CDS position, total trades in that name jumped by a third.
  • OTHER HIGHLIGHTS: Pimco retained its top spot for corporate and non-corporate positions, while the percentage of Ice-cleared trades grew by 5.3 percentage points from the previous quarter. Goldman Sachs saw its overall market share rise by 2.8 percentage points, after being named as counterparty on almost $900 million more trades than in the first quarter.
  • LOOKING FORWARD: Sovereign single-name positions continued to drop from 2020 levels, totalling $21.6 billion in the second quarter, down from $22.8 billion in the first quarter and $25.7 billion in Q2 2020. Most of the latest dip, though, was down to PGIM. If other managers follow suit in the coming months, last year’s totals will start to look more like a pandemic-related blip. For now, more firms are adding than subtracting.

In a lively second quarter for single-name CDS investments, PGIM chopped 27% of its book, while every other manager in the market’s top six ramped up, particularly in some of the sovereign names PGIM chose to exit – such as Mexico, where reported trades jumped by a third on the previous quarter.

The net result was a small decline in the sector’s collective book. Overall fund positions shrank by roughly half a billion US dollars from the first to second quarters, but PGIM’s funds alone reported $2.4 billion less.

Among dealers, PGIM’s move had the biggest impact on Citi and Bank of America, causing the banks to lose 4.2 and 2.7 percentage points, respectively, in US fund market share for single-name CDSs.

The New Jersey manager pared back most notably in swaps referencing Mexico, Brazil, Turkey, China and South Africa. After growing those positions by $1.7 billion from the fourth quarter of 2020 to the first quarter of this year, PGIM dropped nearly all of the gains in the second quarter, holding $1.5 billion less than it had in the first – that’s a pretty rapid reversal.

The moves bucked the broader mutual fund trend. Excluding PGIM, the 25 asset managers with the biggest single-name books would have reported an 8% jump in their collective position. When PGIM’s book is included, the total shrank a little less than 2%.

 

PGIM’s decision to cut activity in specific sovereign names was also contrarian. Indeed, aggregate holdings of Mexico CDSs jumped by nearly a third, from $3.3 billion to $4.2 billion, as the country remained the most popular single name across corporate and sovereign entities. Pimco continued to report the biggest position in the name but saw its market share drop by 10.7% as BlackRock and T Rowe Price piled in – both managers more than tripled their exposure. Barclays took the other side to the largest share of the quarter’s Mexico CDS positions, buying $396 million worth of funds’ sold swaps.

In their Mexico trades, roughly two-thirds of reported trades involved US funds selling protection on the country, in line with the general trend of selling more single-name CDSs than buying.

On the sovereign front, it’s worth noting that Pimco still holds an almost-$2 billion position on the US – down from $3.8 billion in the second quarter of last year. And the West Coast manager is no longer alone, with PGIM executing five tickets in Q2, for a total of $50 million.

 

The rankings are compiled from filings made to the Securities and Exchange Commission (SEC) by individual funds. Filings reflecting fund positions between April 1 and June 30 were aggregated to create the second-quarter ranking. The disclosures provide a snapshot of positions on a fund’s books, so they do not capture the entirety of a fund’s or manager’s trading each quarter.

In the second quarter, 63 managers reported single-name CDS positions referencing more than 400 corporate and sovereign entities. The swaps totalled $33 billion in notional value, down slightly from the first quarter. 

All data from the start of 2020 to the end of Q2 2021 is now available for sorting and analysis via our new Counterparty Radar tool.

Goldman tops SSA table

Since credit default swaps are commonly executed as five-year trades, positions on a fund’s books often carry over from one quarter to the next. In PGIM’s case, the decline in second-quarter reported volumes did not reflect expiring trades – in names including Brazil, China, Mexico, South Africa and Turkey, a number of positions that would have run to 2025 were taken off the books between reporting periods.

PGIM’s Total Return Bond Fund, for instance, reported a $2.1 billion drop in single-name positions. That took an $859 million bite out of Citi’s reported trades with the fund, and reduced Bank of America’s position with the fund by $798 million.

The single fund’s investment decisions had an outsized impact on the two banks. Mutual funds’ second-quarter filings showed a net reduction of $1.5 billion in single-name positions for Citi and a net drop of $920 million for Bank of America.

The declines helped bump Goldman Sachs up two spots to second in the overall rankings, and from second to first in the dealer rankings for sovereign entities, with 21% market share, pushing Citi from the top spot.

Goldman notched its biggest gains with Eaton Vance and BlackRock, as the managers listed the bank as the counterparty for $546 million and $364 million more single-name volume, respectively, in the second quarter.

Additionally, funds reported a larger proportion of trades with clearing house Ice in the second quarter, giving the clearing house a 26% market share, up 5.3 percentage points from the first quarter and 4.4 percentage points higher than a year previously. Reporting guidelines from the SEC instruct funds to disclose a CCP as the counterparty if the trade is cleared. In the second quarter, half of corporate CDS positions on funds’ books were cleared at Ice, the highest share in the past six quarters.

Hungry BlackRock

On the manager side, PGIM’s decline meant Pimco easily held onto its top spot, even though its 37% market share was little changed from the first quarter.

The California-based manager grew its position in swaps referencing Boeing by $188 million and in swaps against General Electric by $170 million, but showed $168 million less volume against South Africa and $123 million less against Italy.

BlackRock gained the most overall market share, after reporting a roughly $600 million increase in its book – most of it driven by sovereign CDSs. The manager’s biggest positions were on swaps against Mexico, where it reported a quarterly increase of $587 million, and against South Africa, with positions remaining just shy of half a billion US dollars.

Other managers to report big jumps included T Rowe Price, which added more than $350 million to its book – a 27% increase. Litman Gregory’s book was $297 million bigger in Q2, up 41%. And TCW Group appeared in the top 25 managers for the first time in six quarters, reporting $317 million in single-name trades in Q2, almost all of which were on Brazil and Mexico.

 
 
 

 

About this data

sec-us-securities-and-exchange-commission

The information used in this analysis comes from Nport-P filings to the US Securities and Exchange Commission. This is a relatively new form, introduced at the end of 2019, which requires mutual funds and exchange-traded funds to file monthly summaries of their portfolio holdings to the SEC. 

The filings include over-the-counter derivatives trades that were live at the time of the filing and include details – on a per-trade basis – such as the counterparty name, the underlying, transaction size and settlement date. The forms are filed to the SEC on a monthly basis and the regulator makes the final filing of each fund’s quarter public 60 days after the end of that period. The filings are in a structured XML form, making it possible to download and parse the data for trends. 

It’s important to caveat the information. While these are pro forma regulatory filings to the SEC and should be accurate, mistakes and miscategorisations do occur. The data was cleaned and obvious errors excluded.

Information from these filings is also the basis for a new tool, Counterparty Radar, which allows users to search the filings information themselves to discover the most popular dealers and most active managers for a range of over-the-counter derivatives. 

We intend to track these stats every quarter, so please get in touch if something doesn’t look right and needs closer investigation, or to suggest other ways to present or analyse the data: [email protected]

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