Micro focus
Credit trading desks had a challenging 2023 as government bond prices swung and spreads widened following the collapse of Silicon Valley Bank in March. For growing its single-name credit default swap business while helping clients to navigate these choppy markets, Barclays is IFR’s Credit Derivatives House of the Year.
Rising interest rates and fears of a looming recession were always going to make 2023 an interesting year for credit markets. But even as borrowers defaulting on their debts moved up investors’ agendas, few would have identified Credit Suisse and the US government as the two main drivers of activity in the credit default swap market when the year began.
Barclays’ credit traders were well-prepared for the remarkable events that followed, leveraging the investments it had made in single-name CDS trading to help shepherd clients through the turmoil. The UK bank said it increased its single-name volumes by about 50% in 2023, comfortably outstripping the roughly 30% growth in the wider market through September, according to post-trade firm OSTTRA.
This expansion in micro trading further rounded out Barclays’ credit derivatives franchise following the impressive growth of its index CDS business in 2022’s macro-dominated markets, reaffirming its position as one of the leading banks in this space.
“Clients see us as someone they can call when there’s a big liquidity event or a big volatility event,” said Finbar Cooke, co-head of European credit trading at Barclays. “That happened with Russia/Ukraine, it happened with USA [CDS] and it happened with Credit Suisse.”
The US debt ceiling drama underlined how a coordinated effort across sales, trading and research fostered Barclays’ success in single-name CDS trading. Barclays highlighted in a detailed research paper that the chance of a US debt ceiling issue with a short-term liquidity problem wasn’t being priced into the CDS market – potentially offering as much as a 40-to-one payout for those who bought protection. The report triggered a flurry of activity from corporates Barclays had never traded with before, alongside the bank’s regular real money clients, resulting in Barclays trading around US$18bn of notional in US government CDS.
Credit Suisse’s crisis in March provided another opportunity for Barclays to prove its mettle. During the peak of the volatility, Barclays’ traders were available for 24 hours a day across the globe to trade Credit Suisse CDS contracts, helping to increase its volumes with clients.
“What was important was keeping a level head, not being sensationalist about any of the stories [surrounding Credit Suisse], understanding how CDS work within different eventualities, and providing liquidity to clients. That all helped us to be relevant and useful [to clients],” said Cooke.
Barclays was active in promoting broader use of single-name CDS away from the headline events of the year. Throughout 2023, the UK bank printed large tickets in high-quality names that have never traded before in CDS – such as Coca-Cola, MasterCard, and Pepsi – to help bank clients reduce risks.
“That was a big win not just for Barclays but for the derivatives market as a whole, where we’ve seen a steady decline [in single-name CDS volumes] for years,” said Yoni Gorelov, co-head of US credit trading at Barclays. “Single-name CDS volumes exploded in general, but the breadth of names traded [also] increased – which was exciting to see”.
Barclays made structural changes to how it traded credit derivatives in 2023 to capitalise on the growing client activity. Emerging market credit indices were split into separate investment-grade and high-yield credit indices for clients to trade. That allowed more effective hedging for real money investors, who prefer hedging investment-grade credit, and hedge fund clients, who favour high-yield names.
Barclays also moved a lot of high-yield single-name CDS either to its “special situations” desk or to specialists who would only trade CDS. That comes off the back of market liquidity deteriorating in recent years, often causing single-name CDS to move more as a function of swings in the broader CDS index as opposed to changes in bond prices.
“We keep trying to be creative around how we can offer more value to our clients,” said Gorelov. “Whether that's on the index side or the single-name side.”
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