Downgrading: Difference between revisions

From The Jolly Contrarian
Jump to navigation Jump to search
← Older edit
VisualWikitext
No edit summary
No edit summary
 
(5 intermediate revisions by the same user not shown)
Line 1: Line 1:
{{a|negotiation|
{{a|negotiation|
[[File:Claudis Blankie.jpg|450px|thumb|center|[[Eye-ess-dee-aye]], yesterday.]]
[[File:Claudis Blankie.jpg|450px|thumb|center|[[Eye-ess-dee-aye]], yesterday.]]
}}{{wasteprov|Downgrading}} {{wasteprov|personnel}} is the process of finding a cheaper unit to do the same job. It is mean to save money and avoid the tiresome and messy [[human error]] that otherwise infect the flawless, crystalline system.
}}{{wasteprov|Downgrading}} {{wasteprov|personnel}} is the process of finding a cheaper person/unit of [[meatware]]/[[chatbot]] to do the same job. It is meant to save money and avoid the tiresome and messy [[human error]] that infect the otherwise flawless, crystalline, money-printing system.
 
In the guise of “juniorisation” it was cited, accurately, as a contributing cause of the [[Archegos]] debacle at Credit Suisse where, but for the grace of God, go the rest of us.
{{subtableflex|45|
===Once upon a time===
===Once upon a time===
When the [[JC]] was but a stripling clerk, his senior [[partner]] assigned to him the job of reviewing this speculative new contract for an important finance client. This was in about 1995.  
When [[JC|I]] was but a stripling clerk, my supervising [[partner]] assigned me the job of reviewing this speculative new contract for an important finance client. This was in about 1995. It was in Wellington, New Zealand.


“The client will take potentially massive, long-tenor exposures under this new contract,” said he, knocking his pipe out on the young contrarian’s head. “Potentially ruinous ones. It is our sacred duty to make sure our client is safe! And that means —”
“Our client [''a high-country sheep farm'']<ref>Okay, it wasn’t ''really'' a sheep farm.</ref> will take potentially massive, long-tenor exposures under this new [[contract]],” said he, knocking his pipe out on my young contrarian head. “Potentially ruinous ones. It is our sacred duty to make sure our client is safe! And that means —”


The partner’s eyes glittered.
The partner’s eyes glittered.


“Daily [[mark-to-market]] [[variation margin]]?” I offered.<ref>Yes, ''of course'' this is an outrageous lie: I was an [[ISDA ingénue]]; I had not the first clue about [[derivatives]], and certainly nothing so sophisticated as [[credit support]], if it even ''existed'' at the time.</ref>
“Daily [[mark-to-market]] [[variation margin]]?” I offered.<ref>Yes, ''of course'' this is an outrageous lie: I was an [[ISDA ingénue]]; I had not the first clue about [[derivatives]], and certainly nothing so sophisticated as [[credit support]], if it even ''existed'' at the time, which it didn’t.</ref>


“No, boy, no!” he shrieked. “No, no, no!”
“No, boy, ''no''!” he shrieked, “no, no, no!”


For a moment I was flummoxed, but then I saw in those black eyes the fierce gleam that comes from countenancing vast professional fees, and I understood.  
For a moment I was flummoxed, but then I saw in those black eyes the fierce gleam that comes from countenancing vast professional fees, and I understood.  


“Billings!”
“''Billings''!” he shrieked, jumping up and down and clapping his hands.


He held out his hand. In his palm: a red pill and a blue pill.
He held out his hand. In his palm: a red pill and a blue pill.


I regarded the document, and then the pills. The contract was slim, rendered on crisp onionskin. It had a five-part {{isdaprov|Schedule}} at the back. It was beautiful — ineffable — ''alien'' in its obliqueness. I mouthed its title, printed in block capitals across the front page: “[[Eye-ess-dee-aye]]”.  
I regarded the document, and then the pills. The contract was slim, rendered on crisp onionskin. It had a five-part {{isdaprov|Schedule}}. It was beautiful — ineffable — ''alien'' in its obliqueness. I mouthed its title, printed in block capitals across the front page: “[[Eye-ess-dee-aye]]”.  


Exactly! said he. “A [[sw-æp]] agreement!”
“Exactly!” said he. “A [[sw-æp]] agreement!”


I flipped the pages. My mind whirred with the other-worldly concepts I beheld: {{isdaprov|Single Agreement}}. {{isdaprov|Merger Without Assumption}}. {{isdaprov|Netting}}. {{isdaprov|Gross-Up}}. {{isdaprov|Default Under Specified Transaction}}. ''What could they all mean?'' I didn't know. I didn’t understand. But I knew — I felt it, deep in my fibre. ''I needed to know.''
I flipped the pages. My mind whirred with the other-worldly concepts I beheld: {{isdaprov|Single Agreement}}. {{isdaprov|Merger Without Assumption}}. {{isdaprov|Netting}}. {{isdaprov|Gross-Up}}. {{isdaprov|Default Under Specified Transaction}}. ''What could they all mean?'' I didn’t — ''couldn’t'' — understand. How could I? But, yet, I felt it, deep in my fibre. ''I needed to know.''  


I took the red pill.  
I took the red pill.}}


And, ladies and gentlemen, that is how we find ourselves looking at each other today, through the vale of tears and resentment we both know as a liquid crystal display. Yes: it ''is'' a [[matrix]], and I ''am'' stuck in here. But, look: don’t worry about me: I can’t bear mawkish sentimentality. And ''I'' wouldn’t feel sorry for ''you'' if our positions were reversed. And, after all, ''I shall outlive you all''.  
And, ladies and gentlemen, that is how we find ourselves looking at each other today, through the vale of tears and resentment we both know as a liquid crystal display. Yes: it ''is'' a [[matrix]], and I ''am'' stuck in here. But, look: don’t worry about me: I can’t bear mawkish sentimentality. And ''I'' wouldn’t feel sorry for ''you'' if our positions were reversed. And, after all, ''I shall outlive you all''.  
Line 32: Line 35:
Ok: enough of the cod-philosophical sci-fi. The notional amount of [[OTC]] [[derivatives]] traded in 1995<ref>According to BIS Triennial Review, since you are asking. {{google3|BIS|Triennial|Review}}.</ref>, when I took my red pill, was roughly USD12 trillion. By 2018 it was nudging USD600 trillion<ref>According to [https://www.isda.org/a/9atME/Key-Trends-in-Size-and-Composition-of-OTC-Derivatives-Markets.pdf ISDA].</ref>. ''Six hundred trillion bucks''.<ref>I know, I know: that is gross notional and not net outstanding exposure. But still.</ref>
Ok: enough of the cod-philosophical sci-fi. The notional amount of [[OTC]] [[derivatives]] traded in 1995<ref>According to BIS Triennial Review, since you are asking. {{google3|BIS|Triennial|Review}}.</ref>, when I took my red pill, was roughly USD12 trillion. By 2018 it was nudging USD600 trillion<ref>According to [https://www.isda.org/a/9atME/Key-Trends-in-Size-and-Composition-of-OTC-Derivatives-Markets.pdf ISDA].</ref>. ''Six hundred trillion bucks''.<ref>I know, I know: that is gross notional and not net outstanding exposure. But still.</ref>


In any case, an {{isdama}} was once a rare and special beast. Nowadays it isn’t — financial institutions negotiate thousands of them every year — and, for fifteen or twenty years [[management consultant]]s all over the globe have pored over the ''{{wasteprov|cost}}s'' of [[negotiation]] to see how to bring them down. This means some kind of [[triage]]. The [[partner]] flipped it to the [[associate]], to the [[trainee]], to the [[in-house lawyer]], to the [[ISDA negotiator]], to the operations clerk.
In any case, an {{isdama}} was once a rare and special beast. Nowadays it isn’t — financial institutions negotiate thousands of them every year — and, for fifteen or twenty years [[management consultant]]s all over the globe have pored over the ''{{wasteprov|cost}}s'' of [[negotiation]] to see how to bring them down. This means some kind of [[triage]]. The [[partner]] flipped it to the [[associate]], to the [[trainee]], to the [[in-house lawyer]], to the [[ISDA negotiator]], to the operations clerk.


It has led to the ''great {{t|dogma}} of {{t|contract}} [[negotiation]]'': ''We must do this cheaper.'' The cry went out. “Percy! Find me people cheaper units to negotiate these contracts!”  
It has led to the ''great {{t|dogma}} of {{t|contract}} [[negotiation]]'': ''We must do this cheaper.'' The cry went out. “Percy! Find me people cheaper units to negotiate these contracts!”  
Line 39: Line 42:


But throughout it all the {{isdama}}, with its different editions, its insufferable [[Tax Representations - ISDA Provision|tax representations]], its {{isdaprov|schedule}}, [[Credit support annex|annexes]], [[The ISDA Protocol|protocols]], [[2002 ISDA Equity Derivatives Definitions|definitions booklets]] — every word of which rendered in committee-crafted 19th century prose — remained the same. Never once did anyone ask: do we really ''need'' all of this? Is it really feasible to expect school-leavers from Bratislava to wade through all this? Could we not make it ''simpler''?
But throughout it all the {{isdama}}, with its different editions, its insufferable [[Tax Representations - ISDA Provision|tax representations]], its {{isdaprov|schedule}}, [[Credit support annex|annexes]], [[The ISDA Protocol|protocols]], [[2002 ISDA Equity Derivatives Definitions|definitions booklets]] — every word of which rendered in committee-crafted 19th century prose — remained the same. Never once did anyone ask: do we really ''need'' all of this? Is it really feasible to expect school-leavers from Bratislava to wade through all this? Could we not make it ''simpler''?
And then, in March 2021, came [[Archegos|an example to illustrate the very point]].


{{sa}}
{{sa}}
*[[Archegos]]
*[[Private practice]]
*[[Private practice]]
*[[Close-out Netting]]: the [[Red Flag Act]] of finance.
*[[Close-out Netting]]: the [[Red Flag Act]] of finance.
*The {{Wasteprov|great dogma of contract negotiation}}
*The {{Wasteprov|great dogma of contract negotiation}}
{{ref}}
{{ref}}

Latest revision as of 16:38, 5 August 2021

Negotiation Anatomy™

Eye-ess-dee-aye, yesterday.
Tell me more
Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

Downgrading personnel is the process of finding a cheaper person/unit of meatware/chatbot to do the same job. It is meant to save money and avoid the tiresome and messy human error that infect the otherwise flawless, crystalline, money-printing system.

In the guise of “juniorisation” it was cited, accurately, as a contributing cause of the Archegos debacle at Credit Suisse where, but for the grace of God, go the rest of us.

Once upon a time

When I was but a stripling clerk, my supervising partner assigned me the job of reviewing this speculative new contract for an important finance client. This was in about 1995. It was in Wellington, New Zealand.

“Our client [a high-country sheep farm][1] will take potentially massive, long-tenor exposures under this new contract,” said he, knocking his pipe out on my young contrarian head. “Potentially ruinous ones. It is our sacred duty to make sure our client is safe! And that means —”

The partner’s eyes glittered.

“Daily mark-to-market variation margin?” I offered.[2]

“No, boy, no!” he shrieked, “no, no, no!”

For a moment I was flummoxed, but then I saw in those black eyes the fierce gleam that comes from countenancing vast professional fees, and I understood.

“Billings!” he shrieked, jumping up and down and clapping his hands.

He held out his hand. In his palm: a red pill and a blue pill.

I regarded the document, and then the pills. The contract was slim, rendered on crisp onionskin. It had a five-part Schedule. It was beautiful — ineffable — alien in its obliqueness. I mouthed its title, printed in block capitals across the front page: “Eye-ess-dee-aye”.

“Exactly!” said he. “A sw-æp agreement!”

I flipped the pages. My mind whirred with the other-worldly concepts I beheld: Single Agreement. Merger Without Assumption. Netting. Gross-Up. Default Under Specified Transaction. What could they all mean? I didn’t — couldn’t — understand. How could I? But, yet, I felt it, deep in my fibre. I needed to know.

I took the red pill.

And, ladies and gentlemen, that is how we find ourselves looking at each other today, through the vale of tears and resentment we both know as a liquid crystal display. Yes: it is a matrix, and I am stuck in here. But, look: don’t worry about me: I can’t bear mawkish sentimentality. And I wouldn’t feel sorry for you if our positions were reversed. And, after all, I shall outlive you all.

What does this all mean?

Ok: enough of the cod-philosophical sci-fi. The notional amount of OTC derivatives traded in 1995[3], when I took my red pill, was roughly USD12 trillion. By 2018 it was nudging USD600 trillion[4]. Six hundred trillion bucks.[5]

In any case, an ISDA Master Agreement was once a rare and special beast. Nowadays it isn’t — financial institutions negotiate thousands of them every year — and, for fifteen or twenty years management consultants all over the globe have pored over the costs of negotiation to see how to bring them down. This means some kind of triage. The partner flipped it to the associate, to the trainee, to the in-house lawyer, to the ISDA negotiator, to the operations clerk.

It has led to the great dogma of contract negotiation: We must do this cheaper. The cry went out. “Percy! Find me people cheaper units to negotiate these contracts!”

First they came for the antipodeans. Then for school leavers in former satellite states of the Soviet Union. Then for the entrepreneurial youngsters in Northern Ireland. Then the unemployed of Bristol. Now they are scouring the outer suburbs of Birmingham. Commercial law firms are not often instructed to thrash out an ISDA any more.

But throughout it all the ISDA Master Agreement, with its different editions, its insufferable tax representations, its schedule, annexes, protocols, definitions booklets — every word of which rendered in committee-crafted 19th century prose — remained the same. Never once did anyone ask: do we really need all of this? Is it really feasible to expect school-leavers from Bratislava to wade through all this? Could we not make it simpler?

And then, in March 2021, came an example to illustrate the very point.

See also

References

  1. ↑ Okay, it wasn’t really a sheep farm.
  2. ↑ Yes, of course this is an outrageous lie: I was an ISDA ingénue; I had not the first clue about derivatives, and certainly nothing so sophisticated as credit support, if it even existed at the time, which it didn’t.
  3. ↑ According to BIS Triennial Review, since you are asking. Let me Google that for you.
  4. ↑ According to ISDA.
  5. ↑ I know, I know: that is gross notional and not net outstanding exposure. But still.
Retrieved from "https://jollycontrarian.com/index.php?title=Downgrading&oldid=58172"