Boston, MA 09/18/2014 (wallstreetpr) – Diversified financial services provider Citigroup (NYSE:C) seems to be closing the gap with the market leader JPMorgan Chase & Co. (NYSE:JPM) on derivative contracts as Citigroup has been swimming deeper into it. Incidentally, the company was one of the beneficiaries of the government’s bail-out package at the height of the financial crisis in 2008.
Surge In Derivatives
In the last five-year period, Citigroup (NYSE:C) has been exposing itself to the derivatives segment at a much higher pace than its peers, Bloomberg said. Its total amount of derivatives jumped 69% topping most of its rivals from the U.S. and closed the gap with the market leader.
As a result, Citigroup (NYSE:C)’s exposure to open contracts stood at $62 trillion at the end of June quarter compared to $37 trillion at the end of June quarter in 2009. This represented a whopping 69% growth. On the other hand, JPMorgan Chase & Co. (NYSE:JPM) has slashed its exposure by 14% to $68 trillion during the same period.
The bank was expanding even as the regulators were trying to rein in instruments that were responsible for the financial crisis in 2008. The bank seemed to have amassed the biggest stockpile of interest-rate swaps since it can move in value in tune with the Central Bank’s policy on rates.
The company appears to have taken a calculated risk that these derivatives could provide a big money when the Central Bank raises its interest rates. Interestingly, over 92% of the bank’s derivatives fail to trade on exchanges thus giving the regulators a tough task to spot the dangers posed by such huge exposure. This has invited George Washington Law Professor, Arthur Wilmarth, to comment that risk-taking was in Citigroup’s DNA.
The regulators too have woken up after the housing bust in 2008 that impacted credit-default swaps insuring mortgage bonds and were demanding banks to maintain more capital for derivative contracts. The government had to bail-out the insurer, American International Group Inc (NYSE:AIG) that divested many of the contracts in order to avoid the collapse of the system.
The bank’s spokesperson Danielle Romero-Apsilos told that Citigroup (NYSE:C) has expanded the derivatives business to meet customers’ demands. The spokesperson also said that the client demand has increased over the past five-year period thus putting the bank in line with its peers.