Customer tiering

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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 only this will nudge this wondrous golden goose across the threshold. The firm would not dream of similar indulgence for a small, pissant client doing a handful of vanilla trades.

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 client taking big risks poses a risk to its counterparties. Precisely when those big risks go wrong, its counterparties will be making big rewards which, if that big goose has just nose-dived into a hole in the ground, they will not be able to redeem.

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.

See also

• All our other counterparties have agreed this