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Derivatives

J.P. Morgan Believed To Be Behind Massive Swaptions Trades

J.P. Morgan is believed to have jumped into the London interest-rate swaptions market in size last week ahead of expectations that the European Central Bank would trim interest rates at its meeting last Thursday. Over EUR1 billion (USD881 million) of three-month options to enter 10-year interest-rate swaps traded last week, according to market officials. A trader at J.P. Morgan said he is not permitted to comment on market activity.

Even though the ECB held rates steady, market officials say the swaptions have value because implied volatility is low. Implied vol on these swaptions was 10.4% last week, compared to a historic average of approximately 13% over the last several years. The swaptions, struck at 5.1%, give the buyer the right to receive fixed and pay the 10-year floating rate in three months. Traders noted that in addition to the swaptions activity in the OTC market, some EUR2 billion (notional) of Bund futures also traded last week. It could not be determined if J.P. Morgan was also behind these positions.

Ulrich Beckmann, co-head of European research at Deutsche Bank in Frankfurt, thinks the ECB will now wait until the Sept. 14 meeting to cut rates because it cut rates in May and was then surprised by high inflation figures. Beckmann predicts the central bank will also shave off a further 25 basis points in the fourth quarter.

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