A dramatic dislocation
Even short-term interest rate futures, which are less susceptible to market swings, declined in turnover by 10%.
The main reason for this is well documented: mortgage-backed security investors were desperately attempting to rebalance the duration of their portfolios, straining the market-making abilities of dealers in swaps and swaptions who then retreated from the market, having no doubt incurred some substantial losses.
During this turmoil, some of the largest derivatives houses reached – and even breached – their value-at-risk limits, while just a couple of weeks earlier they had plenty of headroom.
This period of dramatic market dislocation will be the abiding memory of 2003. As the BIS has highlighted, even some of the largest banks in the world reined in their market-making, effectively telling traders to cut some of their lines.
This episode was a reminder to investment banks how quickly liquidity can dry up. And with the business of derivatives dealing concentrated among fewer and fewer players, the banks’ customers in the wider market will have learned a lesson too: the value of committed relationships.
A number of firms have achieved much in the area of risk management over the past 12 months, and their commitment to their clients and the market are highlighted in Risk’s fifth annual awards.
The aim of these awards is not simply to give the largest houses a pat on the back. They are instead a chance to commend houses that have innovated, punched above their weight or simply been the best of breed over the previous 12 months.
Morgan Stanley, Risk’s Derivatives house of the year, is notable for the enormous goodwill it has created among a range of clients. From the largest – such as Freddie Mac and the Italian treasury – to one-off clients such as the BBC, Morgan Stanley is praised for standing up to be counted when it was needed, understanding its clients’ needs and being prepared to put the firm’s capital at risk on behalf of its clients, where appropriate.
Last March, Warren Buffet described derivatives as “financial weapons of mass destruction”. Buffett was wrong, but as well as celebrating success, this magazine will also continue to draw attention to areas that have gone wrong, or could be improved – in particular the challenges of improving transparency and disclosure in over-the-counter markets.
This is why Patrick de Saint-Aignan makes an ideal choice for Risk’s lifetime achievement award – an individual who has devoted an enormous amount of his time to the betterment of the derivatives industry, and a pioneer of the opportunities risk management provides.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Markets
Swap spread swings push US corporates to rethink locks
Volatile swap spreads have issuers weighing a shift from swap locks to costlier Treasury locks for pre-issuance hedges
Trading platforms evolve for a cross-asset market
As trading becomes increasingly cross-asset, platforms are evolving to deliver consistent workflows, connectivity, intelligence and end-to-end execution efficiency
Sell side losing fight over dirty CSAs, data shows
Risk Benchmarking exercise finds growing buy-side push for collateral flexibility
Macquarie rolls out 2022 playbook for Iran conflict
Talking Heads 2026: Volatile markets and wobbly pricing have tested commodities house
US Treasury clearing: competition, choice and readiness move to the fore
US Treasury clearing mandates and market reforms are reshaping clearing models, risk transfer and market infrastructure ahead of key implementation milestones
Regulatory clarity urged for CME’s single-stock futures
SEC short selling and market access rules may hamper clearing and broker participation
Ripple builds ‘one-stop’ payments shop
Flurry of acquisitions marks latest step in digital payments specialist’s masterplan to crack trad-fi
Calamos combines rival structures with new autocall ETF
Generic local vol model allows exotic payoff to be packaged in index without vol target