Deutsche Bank’s derivatives exposure threatens market, finds JPM analyst

Foreign banks have sought to cut their derivatives exposure to German counterparties over the last year.

Deutsche Bank’s huge derivatives book could cause a contagion effect and threaten markets “if concerns continue”, according to an analyst at JP Morgan.

A note from JP Morgan’s Nikolaos Panigirtzoglou, analyst for flows and liquidity, stated: “In our opinion it is not so much funding issues but rather derivatives exposures that are more likely to trouble markets going forward if Deutsche Bank concerns continue.”

The note states that Deutsche Bank’s derivatives book is “close” to $40 trillion in notional value, with a new market value of $18 billion. The huge size of its derivatives book and its exposures means if it was forced to start unwinding its positions, it could create a contagion effect throughout the markets.

Deutsche Bank is facing substantial pressure following a report from Bloomberg News that 10 hedge funds withdrew their listed derivatives clearing operations and collateral from its prime brokerage service. Among these funds are Millennium Partners, Rokos Capital Management, and Capula Investment Management, according to the Bloomberg article.

In response to the news Michael Golden, a spokesperson for Deutsche Bank, stated at the time: “Our trading clients are amongst the world’s most sophisticated investors. We are confident that the vast majority of them have a full understanding of our stable financial position, the current macroeconomic environment, the litigation process in the US and the progress we are making with our strategy.”

In his message to shareholders on 30 September 2016, Deutsche Bank CEO John Cryan, said: “We have significantly decreased our market and credit risk in recent years. At no point in the last two decades has the balance sheet of Deutsche Bank been as stable as it is today.”

Traders have already sought to cut their derivatives exposure to Germany’s largest bank this year.

According to data from the Bank for International Settlements (BIS), exposure of foreign banks to German counterparties via derivatives contracts was $312 billion as of the first quarter this year, significantly lower than the $408 billion reported for the same period in 2015.