INSUBCONTINENT EXCLUSIVE:
Authors: JordanBy Alastair MarshIn an industry where power and influence are measured in dollars and cents, this may be the most exclusive
club in finance: The price of admission is at least $25 million.
It has no name and no board of directors but has a roster drawn from the
world’s wealthiest and most successful traders
Members essentially become their own one-person firms, even firms within firms, by gaining a seal of approval to deal in the complex
products typically reserved for institutions that manage hundreds of billions of dollars
And all without drawing the attention of Wall Street’s everyday millionaires.
Their ranks are getting more selective
While no one keeps count, people in the industry guesstimate that the total peaked at no more than 3,000 a decade ago and has shrunk
considerably since the financial crisis
Months of interviews have yielded the identities of just 12 individuals who held the prize: an ISDA master agreement.
They have included
hedge fund titans Chris Rokos and Michael Platt, as well as whales at Deutsche Bank AG and Goldman Sachs Group Inc., which became clients of
their own employers.
In the $542-trillion market for over-the-counter derivatives, ISDA agreements set out the trading terms between two
In the vernacular of Adam McKay’s adaptation of Michael Lewis’s The Big Short, they represent “a hunting license” that lets an
investor sit at the “big boy table and make high-level trades not available to stupid amateurs.” The firms that hand them out gain
access to the most desirable customers possible.
“Banks do this business because they can charge two or three times more than they would a
company,” said Manuel de Souza-Girao, a former senior wealth manager at Deutsche Bank and Credit Suisse Group AG
“And it’s a good way of attracting valuable clients.”
People such as Rokos, 47, who has a net worth of $1.2 billion, according to the
Bloomberg Billionaires Index
The British co-founder of Brevan Howard Asset Management, who now runs his own hedge fund, was personally the counterparty on ISDA
agreements in 2013 when he set up a family office
That meant Rokos himself was on the hook if the trades went against him.
Platt, 49, who runs BlueCrest Capital Management, also previously
had a personal ISDA agreement, said people familiar with the matter
Platt’s net worth is estimated at $2.9 billion by the Bloomberg Billionaires Index.
“This is not a product rolled out to your average
trader earning $2 to $5 million a year,” said Nelson Rangel, a former credit trader who is now the chief investment officer of Raven
Capital BV, an investment-management firm for wealthy individuals
“It would be something for famous traders or investors with significant personal wealth who would have no trouble posting large amounts of
collateral.”
Rokos declined to comment for this article, while Platt did not respond to multiple emails seeking comment.
ISDAs are not
only for celebrity investors
A cohort of lesser-known senior bankers and fund managers who don’t appear on the front pages have used the wealth and connections
they’ve built up in the finance industry to gain access.
Sofiane Gharred, 39, made his fortune trading credit derivatives
When serving out a non-compete period in 2014 before starting his hedge fund Selwood Asset Management, he signed an ISDA with Citigroup Inc
and traded the riskiest portions of credit default swap indexes, according to people familiar with the matter.
Gharred, who was born in
Tunisia and studied in Paris, declined to comment on his personal investments
He said he has not placed any personal trades since starting Selwood in London in mid-2015 and that managing his own capital “has never
been a final aim.” Selwood grew its assets under management to $1 billion in its first two years.
To trade swaps and other OTC contracts
with Citigroup, an individual must have a net worth of at least $25 million, $5 million or more of which must be deposited in an account
with the bank, according to people familiar with the matter
Goldman Sachs and JPMorgan Chase Co
require greater wealth, the people said, although in most cases the guidelines can be tweaked for long-term clients.
A spokeswoman for
Citigroup declined to comment on the firm’s derivatives dealings with individuals.
Pasi Hamalainen, a former managing director at Pacific
in California who retired in 2008 at 41 to raise his son and race Bugattis, had ISDA agreements with Citigroup and Goldman Sachs, according
to a person familiar with the matter
The Finnish native, who was a member of Pimco’s investment committee and head of global risk oversight at the company, traded
interest-rate swaps and currency derivatives with the U.S
banks between leaving Pimco and joining Capital Group Cos
Hamalainen died in 2014.
Kieran Goodwin, the former head trader at King Street Capital Management, traded with an ISDA between leaving the
fund in 2010 and starting his own firm in 2012, New York-based Panning Capital Management, according to a person familiar with the
matter.
Hedge fund manager David Peacock also previously had an ISDA, according to people familiar with the matter
A spokeswoman for Peacock, who started his career in JPMorgan’s pioneering credit-derivatives business in the 1990s and is now a partner
and co-head of corporate credit at Cheyne Capital Management in London, declined to comment.
Wealthy individuals were something of an
afterthought for the bankers and lawyers that created the agreement for the International Swaps Derivatives Association, or ISDA, according
to Jeff Golden, a former senior partner at the law firm Allen Overy
He was among the authors of the original 1987 agreement and all subsequent updates.
Derivatives are not just for speculation, though
After taking out a floating-rate mortgage on a house in Kensington, London’s most expensive borough, Guido Filippa signed an ISDA contract
with Goldman Sachs to protect against rising interest rates.
Filippa, 45, said he obtained the agreement via Goldman’s private-wealth
management unit while working as a managing director in the bank’s London office
He entered into a 10-year interest rate derivative that required him to pay an upfront premium of about 4 percent of the value of the
mortgage, while the bank is required to pay him every quarter that a benchmark of interbank borrowing costs is above a pre-defined
level.
Filippa, who left the bank in 2016, declined to comment on how much he paid for his home
He said Goldman expected its staff to conduct their personal investments with the bank for compliance reasons, and that the firm allowed him
to tailor the contract to his specific requirements
Goldman declined to comment for this article, as did JPMorgan.
“I bought insurance against the leverage I took on against my house,”
“Only time will tell how much benefit I will get from the protection I bought, but it allows me to sleep well, whatever happens to
interest rates.”
It’s never been easy to get a personal ISDA agreement, but before the financial crisis banks gave them out more freely,
according to people familiar with the matter
Rules created to prevent another crisis have increased capital costs for lenders trading derivatives that are not processed through a
clearinghouse; what’s more, lawsuits that focused on mis-selling of derivatives prodded banks to be more selective with whom they are
willing to trade.
Billionaire real-estate investor Jeff Greene, who bet against U.S
subprime-mortgage bonds, says he was told in 2006 by Merrill Lynch that he was the firm’s first client to ever get a personal ISDA to
trade credit-default swaps wagering on a collapse in that market.
Spurning an offer to invest with his friend, hedge-fund honcho John
Paulson, Greene put on his own trades and said he made a profit of about $800 million on a portfolio of credit-default swaps protecting
against declines in about $1 billion of mortgage bonds.
Management subsequently ruled against a broader rollout because it was almost
impossible to track an individual’s total exposure to privately negotiated derivatives trades, according to Cliff Lanier, a former
director at the firm who ran a team tasked with marketing fixed-income structured products to high-net-worth individuals.
In some cases,
bank employees have been able to obtain ISDAs to trade with their employers, an arrangement typically facilitated by the bank’s
That was the case at Deutsche Bank, where senior executives, including Raj Bhattacharyya and Boaz Weinstein, had ISDAs with the bank while
employed by the firm.
Bhattacharyya, who remains with the German lender and heads its emerging-markets debt and foreign-exchange franchise
in the Americas, declined to comment, as did Weinstein, who left in 2009 to set up his own hedge fund, Saba Capital Management.
“Deutsche
Bank has strict personal-account dealing controls and procedures in place to prevent conflicts of interest,” said Olayinka Fadahunsi, a
spokesman for the bank in New York.
Goldman Sachs has also traded OTC derivatives with a number of its senior staff
John Wang, a former managing director in New York who ran the bank’s market-making business for products tied to the VIX volatility index,
is one such example.
Wang, who now runs a macro fund in San Marino, California, said he was one of a number of staffers to have ISDAs with
He said he used the ISDA, which is still active, for equity-index and interest-rate option trades.
“I got the ISDA because I’m a prop
trader at heart and needed to be able to invest and was pretty restricted on the desk in terms of what I was allowed to invest in,” said
Wang, who signed a separate agreement with Bank of America Corp.
The set-up whereby a bank trades with its staff can create potential
conflicts of interest, such as when junior colleagues are leaned on to give their seniors a good price on personal trades, which can be
processed through the same desk as client orders, according to people familiar with the matter.
Former employees can also use their
institutional knowledge and relationships to get an ISDA agreement
Simon Morris, who was Goldman Sachs’s head of credit trading for Europe and the Asia-Pacific region until the end of 2016, is one such
example.
He set up a company in January last year to trade with his own money
Boltons Place Capital Management Ltd., which shares the name of a street in Kensington, has an ISDA with Goldman Sachs, according to a
person familiar with the matter
Morris declined to comment.
“It’s only the very upper echelons of the finance world that get this royal treatment,” said Tze Tung
Chong, a former derivatives executive at firms, including Citadel LLC, who now invests in the contracts for his clients at London investment
“You must be very wealthy; you must be financially sophisticated
But perhaps most important of all, you need to know the right people in the banks.”
