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Archegos: Difference between revisions
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This is a proper horror story, make no mistake: Stephen King has not a patch on this. | This is a proper horror story, make no mistake: Stephen King has not a patch on this. | ||
There’s so much I’ve even made a little table of contents. | |||
===Table of contents=== | |||
*[[Archegos#Intro|Intro]] | |||
*[[Archegos#Concerns about Archegos|Concerns about Archegos]] | |||
*[[Archegos#Mis-margining|Mis-margining]] | |||
*[[Archegos#The greatest fool theory|The greatest fool theory]] | |||
*[[Archegos#Had weapons. Didn’t use them.|Had weapons. Didn’t use them.]] | |||
*[[Archegos#Formal versus informal systems|Formal versus informal systems]] | |||
*[[Archegos#The broker that didn’t bark in the night-time|The broker that didn’t bark in the night-time]] | |||
*[[Archegos#Meatware vs. machine|Meatware vs. machine]] | |||
*[[Archegos#People’s front of Judea|People’s front of Judea]] | |||
*[[Archegos#Red flags|Red flags]] | |||
===Intro=== | |||
''Everyone'' involved in the business of prime services, and global markets broking generally, should read {{plainlink|https://www.credit-suisse.com/about-us/en/reports-research/archegos-info-kit.html|the Credit Suisse Report}}. | ''Everyone'' involved in the business of prime services, and global markets broking generally, should read {{plainlink|https://www.credit-suisse.com/about-us/en/reports-research/archegos-info-kit.html|the Credit Suisse Report}}. | ||
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*'''They didn’t keep an eye on the direction of the portfolio''': Archegos at first used the swap book to put on short positions that offset the long bias on its cash book. It used this bias to argue for lower margins — a request the business accommodated, provided the combined portfolio bias did not exceed 75% long or short. Over time Archegos frequently exceeded these limits, often for months at a time, but CS took no action, accepting Archegos’ promises to correct the bias. | *'''They didn’t keep an eye on the direction of the portfolio''': Archegos at first used the swap book to put on short positions that offset the long bias on its cash book. It used this bias to argue for lower margins — a request the business accommodated, provided the combined portfolio bias did not exceed 75% long or short. Over time Archegos frequently exceeded these limits, often for months at a time, but CS took no action, accepting Archegos’ promises to correct the bias. | ||
*'''They didn’t take ''enough'' margin''': Archegos pressured CS to lower its swap margins, citing more favourable margins it was getting from other brokers due to the effect of [[cross-margining]]. | *'''They didn’t take ''enough'' margin''': Archegos pressured CS to lower its swap margins, citing more favourable margins it was getting from other brokers due to the effect of [[cross-margining]]. | ||
===The greatest fool theory=== | ===The greatest fool theory=== | ||
{{quote|''Archegos’s long bias was driven by the evolution of its swaps portfolio. Given the substantially reduced swap margin, Archegos began putting on long swaps (at the new lower margin) with CS, whereas it had historically held its long positions in Prime Brokerage (at a higher margin rate). The lower swap margins—which Archegos assured CS were “pretty good” compared to what its other prime brokers required—no doubt led Archegos to trade more swaps with CS, and Archegos’s holdings at CS increased markedly.''}} | {{quote|''Archegos’s long bias was driven by the evolution of its swaps portfolio. Given the substantially reduced swap margin, Archegos began putting on long swaps (at the new lower margin) with CS, whereas it had historically held its long positions in Prime Brokerage (at a higher margin rate). The lower swap margins—which Archegos assured CS were “pretty good” compared to what its other prime brokers required—no doubt led Archegos to trade more swaps with CS, and Archegos’s holdings at CS increased markedly.''}} | ||
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===Had weapons. Didn’t use them.=== | ===Had weapons. Didn’t use them.=== | ||
{{quote|''At the same time, the contractual protections CS had negotiated with Archegos were illusory, as the business appears to have had no intention of invoking them for fear of alienating the client.''}} | {{quote|''At the same time, the contractual protections CS had negotiated with Archegos were illusory, as the business appears to have had no intention of invoking them for fear of alienating the client.''}} | ||
===Formal versus | ===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. Interpersonal relationships. Understandings. Past practices. Precedents. Expectations. Trust. The [[commercial imperative]].<ref>This isn’t the place for it, but note: these fundamental qualities of commercial life are utterly [[Legible|illegible]] to [[neural networks]], [[Policy|policies]] and [[algorithm]]s.</ref> | 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. Interpersonal relationships. Understandings. Past practices. Precedents. Expectations. Trust. The [[commercial imperative]].<ref>This isn’t the place for it, but note: these fundamental qualities of commercial life are utterly [[Legible|illegible]] to [[neural networks]], [[Policy|policies]] and [[algorithm]]s.</ref> | ||
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Now whether this is what actually happened or not is, mostly, beside the point. But it points to another potential source of destabilising risk: a fellow broker who cares less about the [[commercial imperative]] than you do. Even a small block sale could have triggered, or amplified, a catastrophic run on concentrated holdings in a thin market with a single, incapacitated bidder. | Now whether this is what actually happened or not is, mostly, beside the point. But it points to another potential source of destabilising risk: a fellow broker who cares less about the [[commercial imperative]] than you do. Even a small block sale could have triggered, or amplified, a catastrophic run on concentrated holdings in a thin market with a single, incapacitated bidder. | ||
===Meatware vs. machine=== | |||
Continuing our catalogue of matters human and behavioural that have a bearing here, consider this | |||
===People’s front of Judea=== | |||
Compare and contrast: | |||
{{quote|''Following the [[IA]] review, CS embarked on “Project Copper”, an initiative to “improve [CS]’s ability to identify early warning signs of a default event,” and “enhance [CS]’s controls and escalation framework across functions during periods of stress,” with a primary focus on [[over-the-counter]] [[derivatives]]. Many of the remediation suggestions generated by Project Copper were, and remained, relevant to CS’s handling of Archegos. The Project Copper team also created a new committee, the IB Counterparty Oversight Committee (“CPOC”), co-chaired by the IB’s Chief Risk Officer and Chief Operating Officer, and whose membership included a number of IB senior executives such as the Global Head of Equities. The purpose of CPOC was to analyse and evaluate counterparty relationships with significant exposure relative to their revenue generation and to direct remedial measures where appropriate.'' | |||
:—{{CS report}}}} | |||
{{quote|''The problems that try our souls are those that do not yield to such simple measures [as basic information and common sense]. In the face of such problems, persistence in informatrion gathering can be self-defeating. Prolonged data-gathering is not uncommonly used as a means of ''not'' dealing with a problem: for example, the thirty-year study of whether Standard Oil was a monopoly. When so motivated, information-gathering represents a form of Passivity.'' | |||
:—{{author|John Gall}}, {{br|Systemantics: The Systems Bible}}}} | |||
===Red flags=== | ===Red flags=== | ||
*[[Key person]] risk | *[[Key person]] risk | ||