JPMorgan is in talks to buy a huge trading portfolio from Deutsche Bank

Jamie DimonAP ImagesJPMorgan CEO Jamie Dimon

JPMorgan is one of several banks in talks to buy a huge credit default swap portfolio from Deutsche Bank, according to people familiar with the matter.

The notional value of the trading portfolio is in excess of $US250 billion, according to two of the people.

That would make it the biggest sale Deutsche Bank has undertaken as it looks to pare back its balance sheet.

The sale is not concluded, and JPMorgan isn’t the only bidder looking at taking on the portfolio, according to two of the people.

The portfolio is made up of single-name CDS positions — typically insurance contracts tied to an individual company’s ability to repay its debt.

Deutsche Bank said late last year it would stop trading most of these instruments, as regulation had made the business less attractive. It said at the time that it would instead focus on transactions in corporate bonds, and trade the most active market for CDS, which are those tied to indices.

The bank said in an April strategy update that it would restructure its credit and rates trading business in a bid to improve returns. As part of that plan, it said then that it would reduce gross leverage by 200 billion euroS, equivalent to around $US225 billion.

The German bank sold a portfolio of single-name CDS with a notional value of nearly $US250 billion late last year, according to a report by Risk in January.

The potential transaction Deutsche Bank is discussing with JPMorgan and others, together with the Citigroup transaction and other smaller deals, would help it hit its $US225 billion leverage reduction target, according to one person familiar with the matter.

The transaction comes at a challenging time for the credit markets, with the bond market showing signs of stress and many credit trading desks struggling.

Changes at Deutsche Bank

Deutsche Bank is one of the leading banks globally for fixed income trading, and it suffered as that business slowed during an extended period of lower volatility from 2012 to 2014. The bank was criticised by analysts during that period for not moving to pare back that business sooner.

Anshu Jain, the then co-CEO who had helped build the fixed income units over the course of two decades, was later ousted and replaced by former UBS executive John Cryan.

Cryan said in an introductory address to his staff in July that the bank’s securities and derivatives trading business could no longer be so heavily reliant on using the bank’s balance sheet.

The bank on Wednesday announced huge write-downs. The bank said it expects a third-quarter loss of nearly $US7 billion and the board will recommend a cut to, and a possible elimination of, the dividend for full-year 2015.

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