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{{a|myth|{{image|Ironmountain1|jpg|}}}}{{d|Employment derivatives|/ɪmˈplɔɪmənt dɪˈrɪvətɪvz/|n|}}Financial instruments designed to manage the risk of employment variability. First developed in the early part of this millennium by derivatives pioneer and perennial boiler of pots, {{author|Hunter Barkley}}. | {{a|myth|{{image|Ironmountain1|jpg|}}}}{{d|Employment derivatives|/ɪmˈplɔɪmənt dɪˈrɪvətɪvz/|n|}}Financial instruments designed to manage the risk of employment variability. First developed in the early part of this millennium by derivatives pioneer and perennial boiler of pots, {{author|Hunter Barkley}}. | ||
====Genesis==== | ====Genesis==== | ||
{{Drop|W|hen yet another}} junior customer services manager quit for a crypto startup, Hunter Barkley had an epiphany. | {{Drop|W|hen yet another}} junior customer services manager quit for a crypto startup, Hunter Barkley had an epiphany. His own salary, he knew, was an unhedged contingency apt to rain disappointment across his meagre aspirations. However much he liked his job — it had its fleeting moments of passable distraction — and however good he was at it, he had little practical control over how much he was paid to do it. He was, in the argot, structurally long an option to the market, though one that was stubbornly, deeply, out of the money. In a time of expansion or innovation, when demand was high, his salary ''should'' ratchet up in pleasing annual notches. In times of recession it would not. The record of his own payslips reflected a great preponderance of stagnation. | ||
This dispiriting experience, he supposed, was common to the great, dreary sweep of humankind as it clambered blearily across the clanking gears of industry. There was only one way to medicate, and that was catch one of the waves of hysteria that periodically swept the market, and quit. Barkley was no surfer. | |||
In any case, that was not the revelation, but this: just as the horde of wage slaves were, severally, at the whim of wanton Gods, ''so too were their employers''. Logically, they ''must'' be: the firms were on the other side of the same option after all. | |||
Firms — particularly boring ones — were ''short'' what their servants were ''long'', only at far greater scale. As the hype-cycle crested and troughed, unglamorous firms bobbed ineptly upon Hysterion’s fickle ebb and flow. | |||
Now, thought Barkley: a single worker has but one unit measure of this risk. But her master has, literally, ''thousands''. | |||
One who deploys a turgid multitude to turn its tiresome wheels — a good-sized bank, say — is locked in constant struggle with the tide of batty expectation just to save its personnel from being washed to sea. | |||
The foe, upon this reckoning, were the exciting but stupid enterprises whose sails the prevailing delusion filled. Usually, they had to do with technology.<ref> Inventions like the internet, web commerce, credit derivatives, [[distributed ledger|distributed ledgers]], [[large language model|large language models]] are typical examples.</ref> | |||
In any case, this | Stemming this outward stampede could cost a bank ''billions'' of dollars. Then, as inflated expectations foundered, the tide would turn. Throngs of good workers would be suddenly available on the cheap. Firms could of course rebalance by tactical redundancy, but that was expensive and tended to dent morale somewhat. | ||
In any case, this “employment cost volatility” bore little relation to the bank’s own performance and none at all to its employees’. It was a simple measure of that background market euphoria. | |||
====An idea==== | ====An idea==== | ||
{{drop|H|unter | {{drop|H|unter Barkley was}} a junior [[interest rate swap]]s trader. His experience gave him an idea. ''Why not hedge away this volatility?'' Different sectors were “long” or “short” this babbling hysteria, which he labelled ''[[π]]'', at different points in the cycle. (“[[Π]]” came from the Greek παράνοια, (''paranoia''), and conveyed the pleasing idea of not just madness but circularity, running on a hamster wheel and so on — all fundamental properties of the employment relationship.) | ||
At its onset, “[[Trad fi|trad-fi]]” firms are [[Short|''short'']], and delusional start-ups, [[Long|''long'']] ''[[π]]''. Eventually the lunacy levels off, reality sets in and employment relations [[Mean regression|regress to mean]], whereupon the ''[[π]]'' curve flattens and then inverts. | |||
If one could only match off long and short exposures across the cycle, Barkley realised, firms on either side of the bid could hedge their exposure to [[π]]. | |||
In one of those cruel ironies to whose martial cadence life keeps time, before he could monetise his idea, Hunter Barkley was laid off and, shortly afterwards, imprisoned for manipulating [[LIBOR]]. | |||
“Employment derivatives” would thus lie fallow | |||
while he served out his porridge. But their time would come. | |||
==== A chance encounter at a bar in West London ==== | |||
{{Drop|A|s she neared}} her [[gin horizon]], HR manager Anita Dochter embarked upon an elliptical disquisition to her old pal [[Cass Mälstrom]]. Dochter was agitated about the unstaunchable stream of defections from her firm, a sleepy mid-market broker headquartered in Peterborough. Wickliffe Hampton was haemorrhaging hundreds of compliance and onboarding staff each month to venture capital-funded dotcom start-ups. | |||
Indeed, Mälstrom herself was one: not three months earlier she had been bid away from a [[workstream lead]] role in the firm’s client money compliance change management programme. She was now [[Co-head|Co-deputy CIO]] of [[legaltech]] darling [[lexrifyly]]. | |||
[[lexrifyly]] was flush with stupid amounts of cash and a great elevator pitch but had no product to speak of, no business model, no customers and no obvious plan beyond maintaining a healthy burn rate. Poaching ex-colleagues turned out to be Mälstrom’s sole function. | |||
Dochter was livid. “We ''need'' our people, Cass. They do productive things. You know, [[MIS]] reports. [[Steerco]] [[deck]]s. Operational [[deep dive]]s. [[Netting]] audits. Who will lead the client money remediation programme workstream? Who will manage the [[risk taxonomy]]? Unless we pay ''your'' stupid rates, which we cannot afford to do —” at this point, she fell off her stool briefly — “and give everyone free fruit, safe spaces and a soft play area, they won’t stay with us. But, ''you'',” she hissed, clambering back up and jabbing [[Cass Mälstrom|Mälstrom]] on the lapel, “right now, ''you'' don’t need ''any'' staff. You just need to show your investors you are on point doing fashionably insane things. That does not take actual staff. So stop taking ours.” | |||
Mälstrom shrugged. “Well, how else am I meant to splurge away all this free money?” She lit a cigarette with a [[monkey]]. | |||
As luck would have it Hunter Barkley, fresh out of gaol and making ends meet waiting tables, was rostered on at ''[[Chez Guevara]]'' that evening. Presenting them with the check and some after-dinner mints, he cleared his throat. | |||
“Forgive me, but I couldn’t help overhearing. If you don’t want to lose staff — | |||
“I don’t.” | |||
“— and you don’t need them —” | |||
“She doesn’t.” | |||
“— then why not hedge your employment rate risk with a swap?” | |||
Dochter fell off her stool again. | Dochter fell off her stool again. | ||
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Barkley dropped a slim document on the table. | Barkley dropped a slim document on the table. | ||
Mälstrom prodded | Mälstrom prodded it. “What’s this?” | ||
“An [[NDA]]. Call me.” | Barkley’s eyes glittered. “An [[NDA]]. Call me.” | ||
==== The first employment rate swap ==== | ==== The first employment rate swap ==== | ||
{{Drop|S|o was the}} very first “[[employment rate swap]]” conceived. For an initial period of three years, Wickliffe Hampton would pay its entire operations wage bill, controlled for performance, to lexrifyly. In return, lexrifyly would pay its absurd, grossly inflated but as yet unallocated budget for an equivalent team — there was no such team, of course: this was | {{Drop|S|o was the}} very first “[[employment rate swap]]” conceived. For an initial period of three years, Wickliffe Hampton would pay its entire operations wage bill, controlled for performance, to lexrifyly. In return, lexrifyly would pay its absurd, grossly inflated but as yet unallocated budget for an equivalent team — there was no such team, of course: this was the point — to Wickliffe Hampton.<ref>This was slightly complicated as it was denominated in [[crypto]] and needed to be converted back to Sterling. </ref> | ||
This way, Wickliffe Hampton had the cash required to preemptively bid back restless staff, and lexrifyly could, in time-honoured fashion, guilelessly piddle its investors’ cash up a wall without troubling the operating resiliency of the banking sector, or for that matter, | This way, Wickliffe Hampton had the cash required to preemptively bid back restless staff, and lexrifyly could, in time-honoured fashion, guilelessly piddle its investors’ cash up a wall without troubling the operating resiliency of the banking sector, or for that matter, an [[Human resources|HR department]] that it did not currently have. | ||
If this seemed like a bad trade for lexrifyly, | If this seemed like a bad trade for lexrifyly at the outset, it was not: firstly, cash was cheap, and lexrifyly didn’t care: what was money, when it came to it? Secondly, Barkley’s forward curve models suggested that the looney bid could invert in any number of circumstances: a market crash, hawkish monetary policy, the arbitrary dissipation of mass hysteria or the sudden onset of incipient tech winter. | ||
For these contingencies the ERS was a natural hedge. | For these contingencies the ERS was a natural hedge. While wide-scale redundancies and hiring freezes gripped the fintech sector, the boring old banking industry would box on as it always had. At that point, a fintech that was short ''[[π]]'' under an [[Employment rate swap|ERS]] would have a sensible amount of cash coming in from its bank counterparty to keep the lights on. | ||
====The “PIEBOR” submission process==== | ====The “PIEBOR” submission process==== | ||
{{Drop|I|t was easy}} enough to quantify a bank’s presumptive wage bill since, once you controlled it for hysteria, it was more or less a fixed rate. But what about the ever-changing hypothetical wage bill of a startup? How to gauge that in real-time? And what was to stop a startup gaming the rate easily, by just pretending its actual preparedness to pay stupid money was lower than it really was? | {{Drop|I|t was easy}} enough to quantify a bank’s presumptive wage bill since, once you controlled it for hysteria, it was more or less a fixed rate. But what about the ever-changing hypothetical wage bill of a startup? How to gauge that in real-time? And what was to stop a startup gaming the rate easily, by just pretending its actual preparedness to pay stupid money was lower than it really was? |