Life and Annuity Stocks Weather Credit Suisse Storm

Life and annuity issuers have about $8.6 trillion in assets. They ended 2021 with $3 trillion in “notional,” or total, exposure to derivatives, including $1.2 trillion in options, $1.1 trillion in interest rate swaps, $174 billion in currency swap derivatives and $83 billion in credit default swap derivatives, according to the National Association of Insurance Commissioners’ Capital Markets Bureau.

Insurers’ derivatives are usually set up in such a way that the true amount at risk is far smaller than the total notional value of the derivatives.

Banks and other institutions with data in a recent Office of the Comptroller of the Currency derivatives report had about $195 trillion in notional derivatives exposure, but netted current credit exposure amounted to just $390 billion, or about 0.2% of the total notional exposure.

Derivatives and the Spring Run

Sean Girdwood and other finance law experts at Buchanan Ingersoll & Rooney noted, in a look at the U.S. takeovers of Silicon Valley Bank and Signature Bank, that the Federal Deposit Insurance Corp. and other regulators structured the takeovers in a way that could minimize effects on derivatives arrangements.

Regulators created “bridge banks” to hold most of the banks’ activities, the FDIC does not see the bridge banks as defaulting lenders.

“As a result, absent some independent grounds for default (i.e., defaults based on non-performance), the bridge banks will expect counterparties to continue to perform; and counterparties, therefore, should expect performance from the bridge banks, notwithstanding contractual provisions which would otherwise deem FDIC receivership an automatic default,” according to the Buchanan analysts.

Fitch Ratings said, in an announcement that it was putting UBS ratings on “Rating Watch Negative” because of the Credit Suisse acquisition, that its ratings on UBS and Credit Suisse as derivatives counterparties are the same as the companies’ long-term issuer default ratings, because “counterparties in Switzerland have no definitive preferential status over other senior obligations in a resolution.”

Most information about how the derivatives markets are performing is available only in data systems held behind paywalls.

One derivatives market health window is Intercontinental Exchange’s Move index, which uses changes in the prices of options on Treasurys to track interest rate options volatility.

The Move index spiked to 182.64 Monday, up from 125.27 a year earlier, and up from 167.96 Friday. Increasing market calm helped the index fall to 162.31 at 3:40 p.m. Tuesday.

But Andrea Enria, chairman of the European Banking Authority, on Tuesday told members of the European Parliament’s Committee on Economic and Monetary Affairs that banks must carefully monitor risks related to their derivatives-based hedging arrangements.

European regulators has found hedging weaknesses at some banks when reviewing their stress testing results, Enria said.

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