Pimco, Franklin Templeton affiliates top for Russia derivatives exposure

US mutual funds Pimco, Western Asset Management and Legg Mason held the biggest net long exposure to Russia via credit, interest rate and foreign exchange derivatives at the start of the year, according to an analysis of US fund filings – positions that have been hit hard by sanctions and the country’s deteriorating credit outlook.

A long position is defined either as a net sold credit default swap position on the Russian state, a net interest rate swap position where the fund is receiving fixed and paying the floating MosPrime rate, or where the fund is a net buyer of rubles through FX forwards. The analysis is based on filings made by the Securities and Exchange Commission, which serve as the basis for Risk.net’s Counterparty Radar tool.

Newport Beach-headquartered Pimco had far and away the biggest long exposure to Russia, with $3.75 billion of long derivatives exposure. Of this, $2.37 billion was in FX forwards and $1.38 billion in sold Russian CDSs.

Western Asset Management was next, with $551 million of net long Russia derivatives exposure. This included $399 million through FX forwards and $152 million in ruble interest rate swaps. Legg Mason was third, with a $337 million net long ruble position through FX forwards. Funds associated with the two managers were kept separate and distinct from parent Franklin Templeton, which acquired Legg Mason and its specialist investment managers in 2020.

The figures do not account for underlying cash equity or bond holdings. Only vanilla derivatives products were included, and no attempt was made to calculate unhedged positions.

For some firms, the picture was more mixed. For instance, derivatives held by Eaton Vance suggest a complicated landscape of Russia exposure. While the Boston-based manager held the largest net bought position of Russia CDSs, FX forward trades left it net long the ruble, and interest rate swap trades have the manager as a net payer of MosPrime – the latter two would have suffered in the recent market moves.

As the filings were current as of the end of 2021, it’s not clear if the mutual funds still hold these derivatives trades. These positions would have suffered in the market turmoil since Russia invaded Ukraine on February 24. The ruble tumbled to its lowest value on record, benchmark interest rates more than doubled and the cost of protecting against government default has skyrocketed.

• By far the largest net seller of CDS protection on Russian sovereign debt, Pimco funds showed a $1.4 billion sold position at the end of last year. The figure includes $1.2 billion sold against single-name CDSs and $214 million worth of exposure through the emerging markets index, which has held a 6% weighting of Russia CDSs in recent series. The index’s administrator recently announced that the version launching later this month would not include Russia CDSs.
• Eaton Vance’s $459 million net bought position made it the largest net buyer of Russian default protection at the end of 2021.
• Of the 29 managers showing some kind of Russia CDS exposure on their books at the end of last year, the average position was $33 million in sold protection.

• Pimco consistently held a net long ruble position over the past two years, growing its bought position from $122 million in the first quarter 2020 to $2.4 billion at the end of last year.
• Meanwhile, Vanguard funds collectively held a net short ruble position through FX forwards over the past two years. The manager’s forward positions showed obligations to sell $1 billion of the Russian currency at the end of last year.
• Managers with USD/RUB forwards on their books held on average $53 million in the fourth quarter of 2021.

• Invesco’s $307 million interest rate swap notional gave it the largest net paying MosPrime position among managers in the fourth quarter 2021.
• While Eaton Vance pulled back on its net paying position in the last two quarters, Western Asset Management grew its position from $9 million in the third quarter 2021 to $152 million notional in the fourth quarter.

• The data does not make it possible to discern directionality, but overall, Invesco held the most EUR/RUB and USD/RUB option notional at the end of 2021, with $915 million. The manager has grown and scaled down its ruble option holdings over the past two years, and the most recent figure reflects a decline for the second straight quarter.
• Only 14 managers held options crossing rubles with euros or US dollars. The figures do not reveal the overall direction of each manager’s options positions.

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 exchange-traded funds to file monthly summaries of their portfolio holdings to the SEC. 

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

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.

As the database is updated and improved periodically, data presented may not mirror information published in previously stories. Each story reflects the most accurate representation of data at the time of publication.

Information from these filings is also the basis for a new tool, 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. We will track these stats every quarter, so please get in touch if something doesn’t look right, or to suggest other ways to present the data: [email protected]