Foreign Exchange Derivatives House: Deutsche Bank

IFR Awards 2022
5 min read
Christopher Whittall

Rescue act
Currency volatility picked up sharply in 2022 as central banks began raising interest rates aggressively. For expanding its FX options market share in this turbulent environment, while successfully revamping its electronic offering in FX swaps and forwards, Deutsche Bank is IFR’s Foreign Exchange Derivatives House of the Year.

Foreign Exchange Derivatives House

Foreign exchange markets awoke with a jolt in 2022 following a prolonged period of calm during the previous year’s equity bull market. Russia’s invasion of Ukraine sent the rouble into a tailspin in February, while the US Federal Reserve raising rates at the fastest pace in decades propelled the US dollar into the stratosphere.

The subsequent spike in volatility played into the hands of banks with large FX trading desks, which found themselves processing bumper client volumes as investors scrambled to get a handle on the macro themes dominating markets. Among those, Deutsche Bank stood out from its peers for the impressive market share gains it registered across its FX options desk and the great leaps it has taken in FX swaps and forwards markets, where the bank has made a concerted push.

“We’re very proud [that] our market share tends to go up in times of distress,” said Matthew Pollock, director in FX trading. “We’re there for our clients when they really need us.”

Deutsche’s numbers speak for themselves. Its client options volumes increased 47% in 2022 from the previous year, compared with a 16% rise in market-wide volumes registered at swap data repositories. That built on significant growth Deutsche had achieved in prior years. The Bank for International Settlements' triennial survey showed market-wide options volumes rose 2% between April 2019 and April 2022. By comparison, Deutsche’s options volumes increased 54%.

Logan Campbell, head of FX derivatives trading, said the bank’s outperformance in this high volume, high volatility environment was helped by some important changes it made around how it manages its FX risk after combining its flow and exotic books.

“In some of our [high] volume books [such as] euro-dollar, that enables us to be really efficient in the prices that we show our clients,” he said. “Redoing how we structure our books we really feel has helped us increase our hit rate and increase our volume.”

Deutsche traded its highest notional of options in a single week in September 2022, beating its previous record by 50%.

Among other things, Deutsche was particularly active in helping clients weather the extreme volatility around the time of the UK government’s disastrous “mini-budget”, recording its busiest quarter in sterling markets in five years in the third quarter. The bank saw a 40% increase in price requests and a doubling in its sterling trading volumes to more than 2,000 transactions in the third quarter compared to average quarterly levels. That in turn led to Deutsche’s profit on sterling trades roughly quadrupling compared to average quarterly levels.

“Our risk management tools are excellent so we can see scenarios before they happen,” said Pollock. “We know every aspect of our risk … which gives you confidence to take on the other side of client trades.”

Not content with cementing its leading position in options, Deutsche has also invested heavily in its FX forwards and swaps business with impressive results. Shuo Wu, global head of forward eTrading, has been spearheading those efforts since joining the bank in late 2019.

To do that, Deutsche has built a hybrid business that involves the trading desk still making decisions on how it wants to take risk, sharing its discretionary views about the market and being able to lower prices if it wishes. At the same time, the bank scrapes data from various sources including rates markets, broker pages and exchanges, which are then aggregated to create automated pricing that is “very dynamic”, Wu said.

The bank’s ultra-competitive levels immediately caught the attention of clients when it rolled out its new pricing model at the end of 2020 when volatility was low. But it was in 2022’s choppy markets that Deutsche’s new set-up came into its own with the bank’s forwards and swaps revenues increasing nearly five times in the first nine months of the year from the same period in 2021.

“In volatile markets we were able to navigate through that and offer very consistent pricing,” said Wu. “DB still stands out as the only bank who can really handle all the different market conditions.”

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