Vanguard, FX forwards kingmaker

Counterparty Radar: How the fund giant influenced banks’ overall forwards fortunes in 2020

Good performance

Vanguard is one of the big beasts of the US mutual fund market, boasting more than $7 trillion in global assets under management. But the extent of its domination of the US foreign exchange forwards market was a matter of anecdote only until FX Markets began gathering position data from US funds' regulatory filings last year.

Vanguard stands out from its mutual and exchange-traded fund manager peers by the total value of the forwards trades it enters each quarter. According to data from its US Securities and Exchange Commission filings, the firm had $296 billion worth of forwards on its books at the end of the third quarter of 2020, accounting for 33.84% of forwards trades with all US mutual funds and ETFs.

This was nearly triple its nearest rival Pimco, which had $103 billion. The firm saw similar numbers in the following quarter.

 

 

Looking at the top fund manager users of FX forwards, we can see:

  • Vanguard was the top user across the year for G10.
  • While its trading in non-G10 pairs only makes up around 12% of its total volume, that still makes it the biggest user of those currencies by value.
  • It was also top for EUR/USD, USD/JPY, APAC non-G10 pairs, trades with a remaining maturity of less than three months and trades over $500 million in value.

This dominance means the firm’s decisions on which banks to trade with can have a big influence on their total market share. When banks rise and fall in the rankings in a particular area, there's a decent chance Vanguard is behind it.

Unsurprisingly, Vanguard has a deep bench when it comes to liquidity providers. Over the course of 2020, it used 19 banks, but the amount of business it transacted with each of them fluctuated throughout the year.

 

 

Looking at the evolution of dealers’ market share with Vanguard, there are strong correlations with banks’ market share among all funds:

  • In Q2, Citi had a nearly 16% market share with Vanguard, putting it in second place with the manager. But the bank slid to 13% in Q3, and down to 6.8% in Q4. As a result, Citi’s overall market share for all mutual funds went from 14.79% in Q2 down to 12.48% in Q4, though it still managed to retain top spot.
  • Morgan Stanley had a huge Q2, hitting top spot with Vanguard with nearly a 19% market share, and had a 12.5% share overall across all US mutual funds (up from 10% in Q1). But by Q4 it fell back to 9.1% with Vanguard, and as a result dropped to just under an 8% share overall.
  • Bank of America rose through the year with Vanguard, going from just over 2% in Q1 to 7.66% in Q4. In that period it went from seventh spot overall in Q1 to fifth in Q4.
  • Deutsche Bank and Goldman Sachs also posted smaller but consistent market share improvements with the fund manager through the year, and saw corresponding increases in their overall market share.
  • Australia’s Commonwealth Bank wasn’t used by Vanguard until Q3, but it then managed to transact eight EUR/USD and AUD/USD trades, most of which were over $1 billion. This helped it move from a 0.04% overall market share among all mutual funds in Q2 to 0.56% in Q4, higher than the likes of Credit Suisse, NatWest Markets and Societe Generale.
  • JP Morgan was an exception to the general pattern: it went from a 0.71% share with Vanguard in Q1 to 4% in Q4, but saw a small decline in its overall market share over that period.

About this data

The information used in this analysis comes from Nport-P filings to the US Securities and Exchange Commission. This is a relatively new form, introduced at the end of 2019, which requires mutual funds and certain exchange-traded funds to file monthly summaries of their portfolio holdings to the SEC. The final filing of the quarter is made public 60 days after the end of that period. 

The filings include FX forward transactions that were live at the time of the filing, and state details such as bank counterparty names, currencies, trade sizes and settlement dates. The forms are filed to the SEC on a monthly basis, and the regulator makes the final filing of a given fund’s quarter public 60 days after the end of that period. The filings are in a structured XML format, making it possible to download and parse the data for trends. 

This analysis was based on tens of thousands of Nport-P filings made to the SEC in 2020. It’s important to caveat the information. While these are pro forma regulatory filings to the SEC and should be accurate, mistakes and miscategorisations do occur. The data was cleaned and obvious errors excluded. It was not possible to check every trade, and FX Markets takes no responsibility for filing errors. 

Information from the filings is used as the basis for a new tool, known as Counterparty Radar, which allows users to search the filings information themselves to discover the most popular dealers and most active managers for FX forwards and options. 

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