But this is a really important client

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Of all the preposterous rationales for weakening key protections in your legal docs, this is perhaps the most bizarre: that the client is so big, and is going to generate so much revenue, that it warrants relaxing the firm’s ordinary, prudent, credit and market risk standards to the point of meaninglessness, on the premise that this, and only this, will nudge this wondrous golden goose across the threshold, into the hotel room and onto the satin-sheets of the double-king.

The firm would not dream of similar indulgence for a small, pissant client doing a handful of vanilla trades.

Now, we hope the logical car-crash this thinking represents is apparent on its face, but let’s say it out loud anyway: Said big golden goose generates said huge sales credits revenues because it trades a lot, and in big size. It takes more risk. A LOT MORE RISK. A big client, taking big risks in big size, poses a big risk to its counterparties.

Precisely when those big risks come about, its counterparties will be the other side, making big rewards which, if that juicy big goose has just nose-dived into a hole in the ground, they will not be able to recover. This might leave them with a big hedging problem.

There is no economy of scale when it comes to risk management, folks. It is a diseconomy of scale. The risk is convex. In a bad way. It might be a risk you were prepared to take, in small size, among a diverse and de-correlated group of small clients — and even then it is amazing how those correlations suddenly invert — but taking it in big size, against a single player —is that not the lesson of LTCM, Amaranth and , Enron and Archegos?

Yet, the world-weary old codger sits down on a rock and sets down his staff: for this, my friends, is the immutable way of the universe. We may not like it, but we cannot change it. It leads to two conclusions, neither enormously becoming for your risk management teams. Either we still haven’t learned the lessons of Enron, Amaranth and LTCM, and rely blindly on Black-Scholes models that, as we now know, only work until the point where you really wish they were working — or the sacred protections we carve into those granite master trading agreements carry a lot less real value than we generally care to admit.

Is that piece of paper really the weapon you want when World War Three kicks off? Is the fraught negotiation some kind of charade; a piece of theatre we put on to demonstrate our willing, and keep in perpetual employment entire villages of risk controllers and negotiators — the same ones we seem intent on relocating to Ulan Bator because they’re so freaking expensive?

See also

• All our other counterparties have agreed this
• Don’t take a piece of paper to a knife-fight
• Platinum client