Downgrading

Downgrading personnel is the process of finding a cheaper unit to do the same job.

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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.

“The client will take potentially massive, long-tenor exposures under this new contract,” said he, knocking his pipe out on my head. “Potentially ruinous ones. It is our sacred duty to make sure it is safe! And that means —”

The partner’s eyes glittered: the fierce gleam of eyes belonging a man countenancing enormous professional fees. He held out his hand to me. 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 at the back. It was beautiful — strange — alien in its ineffable obliqueness. I mouthed its title, printed in block capitals across the front page: “Eye-ess-dee-aye”.

My mind whirred with the other-worldly concepts: Single Agreement. Merger Without Assumption. Netting. Gross-Up. 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 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 you worry about me: I can't bear mawkish sentimentality. I wouldn’t feel sorry for you if the roles 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 when I took my pill in 1995 was roughly USD12 trillion. By 2018 it was nudging USD600 trillion. Six hundred trillion bucks.

but in any case, an ISDA Master Agreement was once a rare and special beast. Nowadays it isn't — large institutions negotiate thousands of them every year — so management consultants the world over are poring over the costs of negotiation to see how to bring them down. This means some kind of triage.