How Risk.net’s robots unlocked Ucits trade data

Machine learning tool reveals the largest European derivatives users – and who they trade with

When Ucits funds need to hedge foreign exchange risks, they often turn to European dealers for liquidity, with around a third of FX forwards executed with HSBC, BNP Paribas and UBS.

But when it comes to credit derivatives, US banks dominate, with Citi, Goldman Sachs and Morgan Stanley accounting for around 40% of volumes. 

These findings are based on a new trove of data on the derivatives activities of Ucits funds, which is now available as part of Risk.net’s Counterparty Radar service.

The data reveals never-before-seen behaviours of Ucits funds across five commonly traded derivatives instruments: FX forwards, interest rate swaps, inflation swaps, index credit default swaps (CDSs) and single-name CDSs.   

Lombard Odier Investment Management splits its index CDS trades almost equally between Citi and Goldman Sachs. Over the course of 2023, JP Morgan replaced Barclays as HSBC Asset Management’s preferred counterparty for single-name CDS trades. Amundi Asset Management sent Societe Generale almost $5 billion of new FX forwards business in the second half of the year. Robeco relies almost exclusively on Barclays for interest rate swaps, while Schroders uses Morgan Stanley as its sole counterparty for inflation swaps.

$750 billion

Current notional value of the Ucits funds in Counterparty Radar’s database

Counterparty Radar launched in 2022 with data on the derivatives positions of US mutual funds and exchange-traded funds. Two years earlier, the US Securities and Exchange Commission required retail funds to disclose their investment positions in a standardised XML format. This meant it was relatively straightforward for us to extract the data, even if it took months of work to organise and present it in a digestible way.

Last year, we added trade-level data from US life insurers. This proved to be a bigger challenge. While all US retail funds follow SEC rules, life insurers are supervised by individual state commissions. This leads to non-standardised filings, which are typically available as PDFs or Excel sheets. To bring life insurer data to Counterparty Radar, we had to distil the filings into their core components and reassemble them on the platform in a consistent manner – a laborious and manual process which again took months to complete.

Ucits funds were a more complex problem again.

The European Union’s Ucits directive requires fund managers to publish yearly and half-yearly reports that include details of transactions executed during the reporting period. An amendment to the directive adopted in 2010 gave the European securities regulator the power to develop rules that would ensure “consistent harmonisation” of the transparency requirements. But these standards were never developed, resulting in a mishmash of obscure and opaque reporting practices. (New reporting requirements are expected to be created by 2027.)

Some asset managers encrypted their filings as if they were protecting the launch codes for a nuclear arsenal

There is also no centralised platform to access Ucits filings. They exist exclusively in PDF format, lack any uniform structure, and are usually hidden in the darkest corners of asset managers’ websites. Even fund families within the same firm can have completely distinct filing formats, rendering any attempts to standardise extraction virtually impossible.

Any market participant – or indeed regulator – wishing to gather an overview of Ucits activity has a job of near Sisyphean scale.

At Risk.net, we realised this was not a task for humans alone. We needed a robot. Using machine learning techniques, we began teaching a bot how to read Ucits filings and identify specific pieces of information. If the bot was confused – a frequent occurrence – a human would point it in the right direction.

Even when our machine had learned everything there was to know about Ucits filings, there were roadblocks to overcome. Some asset managers encrypted their filings as if they were protecting the launch codes for a nuclear arsenal. Others reported their trades as a single large basket, with equities and rates positions alongside FX and credit, making it impossible to derive any useful information. Regulators may have mandated these disclosures, but they seem not to care whether they make any sense.

Related

New data reveals Pimco is top Ucits interest rate swaps user 

HSBC loses FX forwards market share with EU funds 

We decided to focus on the 50 largest Ucits fund managers – at least for now, with a view to adding more in the future. We suspect that derivatives usage is mostly limited to this group, as even within the top 50, not all firms use the full range of derivatives instruments, in stark contrast to US asset managers.

The quality and frequency of Ucits disclosures is still a long way behind the US, where mutual and exchange-traded funds are already required to make standardised quarterly disclosures and will have to do so on a monthly basis starting late next year.

Despite the challenges and shortcomings of Ucits filings, the work has been instructive. The Counterparty Radar database now includes 2,150 Ucits funds that report approximately 50,000 trades every six months, with a notional value of around $750 billion. This is a level of transparency that did not exist before.

The data is throwing up some fascinating insights. For instance, it’s well known that Pimco is the leading counterparty for interest rate swaps in the US mutual fund space. But did you know that the bond giant’s position in Europe is even more dominant, accounting for more than three-quarters of the total value of traded swaps last year among the 15 most active Ucits managers?

Or that HSBC lost more than $28 billion of FX forwards business from European funds run by JP Morgan Asset Management and Vanguard in the second half of 2023?

All the underlying data on Ucits funds is available on Counterparty Radar’s online platform, so readers can conduct their own analysis and discover more of the secrets of the global derivatives markets.

Editing by Alex Krohn