Top dealers slash equity exposures in Q2

The majority of the world’s largest market risk-takers slashed their equity market exposures during the second quarter of 2006, as they responded forcefully to sharp spikes in equity volatility in late May and early June.

UBS, which had the largest value-at-risk in Risk’s VAR Rankings 2005 (Risk, July 2006), slashed its end-of-quarter equities VAR (10-day holding period, 99% confidence level) by 46% to Sfr159 million ($129 million) by June 30 from Sfr294 million at the end of the first quarter. Its average equities VAR fell 22% from Sfr267 million in the first quarter to Sfr208 million for the second period.

“After the buoyant equity markets seen at the end of [the] first quarter, sentiment turned negative in the middle of [the] second quarter,” says UBS in its second quarter financial results statement. “Our equity exposure was reduced as we actively managed exposure to falling equity markets and some proprietary positions in merger and acquisition stocks were closed.”

The situation was similar at JP Morgan Chase, which cut its period-end equities VAR (1-day, 99% confidence) to $21 million compared with $46 million for the end of the second quarter of 2005 – a 54% decline year-on-year. Accounting for its overall decrease in second quarter VAR, the dealer said in its 10-Q: “The decrease was driven by declines in both fixed income and equities offset by higher VAR for commodities.”

JP Morgan’s second quarter average VAR fell to $24 million compared with $45 million in 2005 and $32 million average for the first quarter of 2005. But its quarter-end VAR was only down $2 million, or 8.7% compared with its end of first quarter VAR of $23 million.

The reduction at Citigroup was much more muted. Its June 30 equities VAR (1-day, 99%) fell just 4.6% to $41 million compared with $43 million at the end of March this year.

The situation was markedly different at Goldman Sachs. The US dealer saw its average second quarter equities VAR (1-day, 95%) rise by 219% from $26 million in 2005 to $83 million this year. Goldman Sachs’ equities VAR at the end of its second quarter stood at $100 million, compared with $57 million at the end of the same period in 2005.

However, Goldman Sachs reported its second quarter financial results on May 31, a month earlier than the commercial banks, so its results might not necessarily reflect actions taken in response to the sharp rises in volatility.