Quantifying market share

It’s not often that, in the ego-heavy world of investment banking, major financial institutions seek to downplay their market share.

But that’s exactly what David Coulter, vice-chairman of JP Morgan Chase, did in a keynote speech at the International Swaps and Derivatives Association annual meeting in Chicago at the end of March.

Coulter considered the risk management industry numbers that can cause fear among insiders and outsiders alike, and sought to look behind them. So when people were concerned about the notional volumes of exposure, he said, it was important to explain the impact of collateralisation and netting agreements. JP Morgan Chase’s net exposure post-collateral is $48 billion (compared with a notional of $34 trillion). That, Coulter says, compares with the firm’s corporate loan portfolio, and puts the true exposure in perspective.

The speech also sought to allay fears about the concentration of the derivatives business among a small group of major dealers – the largest of which, of course, is JP Morgan Chase.

Coulter said his firm’s market share was often wildly overstated. Based on Bank for International Settlements data, the firm accounted for about 18% of the global derivatives market, with Deutsche Bank at 10% and Bank of America at 8%. JP Morgan Chase’s high share was principally due to its dominant role in the inter-dealer market for interest rate contracts.

Whatever the size of its market share, JP Morgan Chase has emerged as the number one derivatives dealer of choice for corporates and asset managers alike, with a share (of overall votes) of over 14% from both constituencies.

This year, Risk has expanded its end-user rankings to create a clear picture of which banks provide the best service to their most important clients. The picture that emerges is one that at the same time may increase the concerns of those worried about over-concentration in the derivatives industry, but also provides some encouragement.There is a clear top tier of derivatives firms, made up of the largest global universal banks that dominate the market – namely JP Morgan Chase, Citigroup, Deutsche Bank and UBS – plus a lone investment bank, Goldman Sachs, which has apparently secured a seat at the top table.

Beneath this lies a second tier of firms seeking to join the premier league – if not across all asset classes, then at least in certain product or currency areas. As many as a dozen firms fall into this group. Not all of them will be able to fulfil their ambitions. But the number of firms that will consider their rightful place to be in the top tier shows how competitive the industry remains.

The aim of our expanded rankings, as well as providing a snapshot of the leading players at this time, is hopefully to be able to track the relative performance of leading firms in rates, foreign exchange, equity and credit derivatives – in effect, a qualitative league table of derivatives dealers. Our rankings start on page 50.