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Archegos: Difference between revisions
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Here is a sort of [[convexity]] risk: If you offer the most favourable terms on the street, then customers will tend to put their positions on with you. If your swap margins are lower than your [[cash brokerage]] margins, your customers will tend, [[all other things being equal]], to put their positions on swap. Water runs downhill. | Here is a sort of [[convexity]] risk: If you offer the most favourable terms on the street, then customers will tend to put their positions on with you. If your swap margins are lower than your [[cash brokerage]] margins, your customers will tend, [[all other things being equal]], to put their positions on swap. Water runs downhill. | ||
You read variations of the following a ''lot'' in the Archegos report: “if we increase margins [to risk-acceptable levels], we will lose the business”. Indeed, you will hear variations of that theme, every day, uttered by anxious [[salespeople]] in every brokerage in the City. Salespeople ''would'' say this: their ''role'' is to say things like this: they speak for their clients, and their own bonus prospects, at the table where business is discussed. But others at that table — notably risk — should be taking the other side of that conversation. | You read variations of the following a ''lot'' in the Archegos report: “if we increase margins [to risk-acceptable levels], we will lose the business”. Indeed, you will hear variations of that theme, every day, uttered by anxious [[salespeople]] in every brokerage in the City. Salespeople ''would'' say this: their ''role'' is to say things like this: they speak for their clients, and their own asymmetrical bonus prospects,<ref>This is the famous “Bob Rubin trade”: heads I win, tails you lose: If the client generates revenues of $100m, the salesperson get paid a lot. If the client generates losses of $100m, the salesperson gets paid nil — but at no point does she have to pay anything back.</ref> at the table where business is discussed. But others at that table — notably risk — should be taking the other side of that conversation. | ||
So should your risk team be led, as CS’s was, by ex-salespeople with no experience in risk management? Probably not. Should it be business-aligned at all? Interesting question. | So should your risk team be led, as CS’s was, by ex-[[salespeople]] with no experience in risk management? Probably not. Should it be business-aligned at all? Interesting question. | ||
In any case it seems the fears of CS risk executives, that they might be uncompetitive if they raised margins, was flat out wrong. | In any case it seems the fears of CS risk executives, that they might be uncompetitive if they raised margins, was flat out wrong. | ||