Hedging Strategies from Q3 2023

We reviewed hundreds of earnings calls and disclosures from Q3 to identify relevant balance sheet hedging strategies.

Isaac Wheeler
Isaac Wheeler
Head of Balance Sheet Strategy
Strategies In Action: Q3 2023

Hedging against higher rates remained a focus for banks in Q3 based on our review of hundreds of earnings calls and disclosures. Over two-thirds of the derivative strategies discussed on earnings calls were those that protected against rising rates, unsurprising given the 50-75 basis point increase in swap rates last quarter.

SOFR Swap Rates

The benefits of pay-fixed swaps, caps and swaptions remained two-fold in Q3. Some institutions executed hedges to protect investment portfolios and in turn capital from higher rates. Others established hedges to protect net interest margin as deposit costs continued to climb faster than loan yields. Our analysis of banks within the S&P Regional Bank Index showed not only the prevalence of rising rate hedges, but that these trades were twice the size of hedges against falling rates when normalized for bank size.

Hedge Notional Executed: S&P Regional Banking Index

However, sentiment may be shifting following the FOMC’s “dovish pause” and the soft inflation data from last week.

As the market digests the potential for rate cuts in 2024, hedges against rate declines have garnered more attention. We recently outlined several cost effective hedging strategies to insulate earnings from lower rates. Notably, many of the banks that described downside hedging strategies on Q3 earnings calls utilized floors, collars and forward-starting interest rates swaps- allstructures that minimize the initial cost of hedging.

To read our full summary of all bank hedging commentary from Q3 earnings calls, click on the link below:

Isaac Wheeler
Isaac Wheeler

Isaac Wheeler is Managing Director and Head of Balance Sheet Strategy at Derivative Path, where he helps financial institutions structure and execute hedging transactions. Before joining the firm, Isaac spent five years at MFS Investment Management supporting execution of interest rate, currency and equity derivatives. He also spent time in MFS’s portfolio risk and technology teams. Isaac has a B.A. in Economics from Boston University.



The Term “Derivative Path” refers to affiliates, Derivative Path, Inc. and Derivative Path Hedging Solutions, Inc. Derivative Path, Inc. is headquartered in the State of California. Hedging advisory and execution services are provided through Derivative Path Hedging Solutions, Inc. (DPHS). DPHS is a Commodities Futures Trading Commission (CFTC) registered Introducing Broker (IB) and Commodity Trading Advisor (CTA) and member of the National Futures Association (NFA). This communication is for informational purposes only, is not an offer, solicitation, recommendation, or commitment for any transaction or to buy or sell any security or other financial product, and is not intended as investment advice or as a confirmation of any transaction. This communication is intended as an information resource only; Derivative Path has taken reasonable measures to ensure the accuracy of this communication. Any information contained herein is not warranted as to completeness or accuracy, and Derivative Path accepts no liability for its use or to update or keep any such information current. The content of this communication is subject to change at any time without notice. For additional information, you can read more here.

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