Derivatives houses, reportedly including Citibank, Deutsche Bank and BNP Paribas, have built up millions of dollars of mark-to-market losses on cross-currency interest rate swap positions in Korea. The value of the positions plummeted after the spread between cross-currency interest rate swaps and domestic swaps widened because Moody's Investors Service downgraded its outlook on the sovereign's A3 rating. One head of swaps at a U.S. firm in Seoul estimated most foreign firms have suffered mark-to-market losses of USD3-10 million in the last few weeks. Richard Tesvich, spokesman at Citibank, Anastasia Chye, spokeswoman at Deutsche Bank, and Virginie Ourceyre, spokeswoman at BNP Paribas, declined comment on the swap positions.
K.H. Kim, v.p. in derivatives products at Société Générale in Seoul, explained that the spread between cross-currency interest-rate swaps and domestic swaps has jumped to 142 basis points Monday from 57bps last month. This is largely because the cross-currency swap rate has fallen to 3.32% from 4.27%. It is this move that has spurred the losses. Kim declined comment on losses at individual houses.
The foreign swap houses executed prop as well as hedged client positions last year in which they paid fixed won and received six-month dollar LIBOR in one swap and simultaneously entered another swap in which they received fixed won and paid the three-month CD rate--the domestic benchmark floating rate, according to Kim. The fact that the gap between the two fixed rates has widened is resulting in paper losses on the swaps as the firms are locked into paying above market rates on the cross currency swap.
Rival swappers said Citibank has recently entered well over USD500 million (notional) of proprietary and client hedging positions, paying fixed won and receiving floating dollars in cross-currency interest rate swaps. "They probably got hit the hardest," noted one trading head in Seoul, who has been a counterparty to the bank on several of these trades. Citi is rumored to be sitting on well over USD10 million in paper losses, according to several traders. Deutsche Bank and BNP Paribas were also reportedly hit with mark-to-market losses, but to a lesser extent, said the swappers. Although it could not be determined whether the firms still hold these positions, the only way for them to have avoided the losses would have been to sell, or hedge, the swaps before the ratings action.