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===Had weapons. Didn’t use them.=== | ===Had weapons. Didn’t use them.=== | ||
===Formal versus [[informal systems]]=== | |||
And here we see the behavioural crux: we tell ourselves that what matters in risk management are the formal boundaries we draw; the official channels; the technical superstructure of the relationship; the architecture of the parties’ rights and obligations versus each other. But this isn’t true. In practice the relationship is governed by soft, morphing, invisible, ''informal'' boundaries. Relationships. Understanding. Trust. The [[commercial imperative]]. | |||
Not only that, but there is a fundamental asymmetry in that softness ''between'' the parties: the relationship, after all is one of service provider and customer. The custome sees the edges of its rights and obligations as, for the most part, hard-edged economic options, to be exercised without fear or favour, regardless of the impact of their exercise on “the house”: if you run a roulette wheel with odds favouring the customer, expect your customers to exploit it mercilessly until you correct your algorithms. Thus, Archegos was entitled to withdraw its excess variation margin, and its broker had little option but to comply ''''without blowing up the relationship''. On the other hand, the recalibration of [[initial margin]], whilst framed as a contractual right, on three days’ notice, was understood to be nothing of the kind, ''unless the conditions justifying exercise were so unbearably dire as to give the broker no plausible alternative''. | |||
The broker is a ''service provider''; it wishes the client only well. It presents its risk management parameters (for example, rights to raise margin) not as targets it intends to hit mechanistically of their conditions are triggered, but last resorts it will deploy with a heavy heart and ''only if calamity otherwise awaits''. | |||
So while a contractual right held by the client more or less means exactly what it says, the broker it draws its formal boundaries well ''inside'' the area it is prepared to let the client, in practice, wander. ''[[NAV triggers]] are never exercised''. If the client approaches the edge of that wider area — a ''real'' point of no return for the broker — the broker will not mechanicistically pull triggers and detonate positions: instead, it will reason with the client, realising that precipitous action | |||
===Red flags=== | |||
*[[Key person]] risk | |||
*[[Volatility|Volatile]] performance | |||
*Mediocre operational management practices | |||
*Fraud risk | |||
*Poor risk management practices and procedures | |||
{{sa}} | {{sa}} | ||
''{{plainlink|https://www.credit-suisse.com/about-us/en/reports-research/archegos-info-kit.html|Report on Archegos Capital Management}}'' | ''{{plainlink|https://www.credit-suisse.com/about-us/en/reports-research/archegos-info-kit.html|Report on Archegos Capital Management}}'' | ||