February 9, 2012 – 1:49 am
Credit Suisse (CS) has announced it will pay a portion of its bankers’ bonuses with a structured note instead of cash. The note pays a fixed coupon of around 6% per year, and is backed by a package of derivative contracts currently in the balance sheet of CS. Since the value of the portfolio is [...]
December 6, 2011 – 12:58 pm
Much has been said about MF Global, the US brokerage and clearing group that filed for bankruptcy in late October. In March 2010, when Jon Corzine was brought in as the CEO, MF Global’s franchise in brokerage and clearing operations was strong, but had tallied a string of losses. Corzine was tasked with cutting expenses [...]
November 29, 2011 – 5:01 pm
In the world of finance, the name Metallgesellschaft (MG) is known primarily as one of the early “derivative disaster” cases. MG was a metal, mining and engineering company, and the 14th largest corporation in Germany. At the start of 1994, the company stood on the brink of bankruptcy because of more than $1 billion in [...]
October 26, 2011 – 6:12 pm
The Volcker Rule contained in the Dodd-Frank financial reform act bans banks from proprietary trading. In order to implement the Rule, it is necessary to distinguish proprietary trading activities, which are proscribed, from market-making activities and other traditional banking functions, which are allowed. Many traders at banks claim that this distinction is impossible to make [...]
September 29, 2011 – 3:34 am
A Bloomberg article details how a draft of the Volcker Rule uses the structure of trader compensation to distinguish between proprietary trading and market making. Exactly right!
September 28, 2011 – 8:55 am
The case of the $2.3 billion trading loss at UBS holds many lessons for any company that trades derivatives. Remember, UBS wants to claim its trader was a rogue that victimized the company. There was a time that a bank could shout ‘rogue’ as an effective excuse of senior management. But that time is now [...]
September 23, 2011 – 2:11 am
It is becoming clear that the UBS scandal that rocked financial markets last week is not just about a single trader suddenly gone awry. UBS’s controls – both in risk management and auditing – failed miserably. Top bankers in the investment banking arm of UBS didn’t have a clue about what was going on in [...]
September 19, 2011 – 6:59 am
The corporate finance practice team at McKinsey & Co has joined the long line of people looking at the large cash hoard being assembled by corporations and asking “why?”. In an article in the McKinsey Quarterly, they suggest a surprising answer: One factor that might go unnoticed, however, is the surprisingly strong role of decision [...]
August 11, 2011 – 9:50 am
E.ON, is a large European electricity and natural gas company. It manages its trading operations as a separate profit center. The traders are both responsible for optimizing E.ON’s own generation and other assets–sourcing inputs cheaply and maximizing the value of outputs–and also for running a proprietary trading book. E.ON just announced its second quarter results [...]
Good internal risk controls involve carefully distinguishing between different types of trading. Many companies that do significant trading to hedge their market risks explicitly forbid proprietary trading. Others explicitly try to profit from proprietary trading, but it is still important to keep the proprietary trading book separate and under proper control. So, for anyone interested [...]
