Royal Bank of Scotland Financial Markets shocked the sterling interest-rate swap market last week by reportedly snatching a chunk of swap business from co-book runner Citigroup on behalf of Welsh Water, which was looking to unwind a hedge. "There was blood in the waters," commented a senior swapper at a rival firm, noting that taking business from a co-book runner is taboo. "There is normally a gentleman's agreement," said another. Citigroup units Citibank and Schroder Salomon Smith Barney had agreed to share interest-rate swap and bond underwriting duties, respectively, with RBS, according to officials at the firms. Officials at the firms denied any bad blood on the deal.
The point of contention, say rival bankers, came when Welsh Water last week started to unwind a long-dated GBP1 billion (notional) interest-rate swap position it had built up with Citibank over the last two months in anticipation of the GBP1.9 billion bond issue, which is expected to close Thursday. Rather than unwind the position with Citibank, Welsh Water instead entered some GBP500 million (notional) in off-setting swaps with RBS, executing most of the trades last Tuesday, the bankers said. Traders said this left Citibank with part of the hedge still on its book, which it was trying to lay-off in the direct market last week.
Swappers at Citibank and RBS declined all comment. William Cumming, v.p. securitization at SSSB in London, denied there is a dispute between the two banks. He added, "We are joined at the hip on this deal," declining all further comment. Richard Bartlett, head of corporate securitization at RBS in London, said the market confusion that resulted from RBS entering the swaps, rather than Citibank, could only have helped get the best price for the client. He added the accusation of bad feelings between the two banks was "arrant nonsense."
In the swaps entered last week RBS receives fixed and pays six-month LIBOR. As a result of the Scottish Bank's activity the spread between the yield on 10-year U.K. gilts and the 10-year swaps curve widened approximately four basis points between Tuesday and Thursday, according to London swappers. Traders noted that since most of the swaps were entered on May Day, liquidity was thin and this amplified the impact of the trades on spreads.
An official at Welsh Water declined comment.