The nameless group confers “a hunting license” that lets an investor sit at the “big boy table and make high-level trades not available to stupid amateurs.” By Alastair Marsh Alastair Marsh May 2, 2018, 9:01 PM PDT In 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 parties. In the vernacular of Adam McKay’s adaptation of Michael Lewis’sThe Big Short, they represent “ahunting license” that lets an investor sit at the “big boy tableand 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.” https://www.bloomberg.com/news/feat...he-world-s-most-elite-and-secret-traders-club
Is this the same ISDA agreement that those 2 traders were trying to get via the interview in that bank's building lobby in the movie "The Big Short"?
I don't understand this article, because from what I read an ISDA agreement is just that, an agreement, a contract, so anyone can "have one" by just writing one. You wouldn't have to go to anyone to become certified, or be invited into some kind of a group, you just write the contract and then find a counter-party i.e. enter into an agreement with someone who matters, either because they have derivatives to sell, or want to buy them. Saying these agreements are some kind of ticket into a club doesn't seem accurate, it'd be like saying that being able to write a naked option was the ticket into some kind of club, or being able to write a check from a bank is a ticket into some kind of a club, or being able to write a lease was a ticket into some kind of club. And .. yeah, I suppose that's true in a way, but that's not how the article makes it sound.
I didn't read the article but based on that blurb above its pretty confusing and misleading. As someone who traded with the people named above on their ISDA agreements, I can tell you the reason they are going away is less about getting more exclusive and more about the need for them, the relative cost of trading bilaterally and regulations pushing derivatives to clearinghouses. About 10 years ago everyone had ISDA agreements and also at times cleared their derivatives with a clearinghouse called LCH. A few years later CME became a CCP and today the mass majority of the trading that was done bilaterally via ISDA agreements is cleared at a CCP making the agreements unnecessary (and expensive from a capital perspective thanks to regulations) for many. If you are trading products that are not able to be cleared then, yeah you need an ISDA and would trade using it. So, sure I guess its for people at the big boy table not available to stupid amateurs but that's a pretty sensationalized view of what's really happening there IMO.
A contract requires two parties. If you and your neighbor sign an ISDA, you're right, it means nothing. If GS agrees to an ISDA with you, you have access to a bunch of products you didn't have access to before and few individual traders do. The ISDA isn't a big deal, an ISDA with GS or DB is (if you're geeks like us who are into these things).
I read the article finally so just like everyone said, ISDA agreement is just a contract that allows one to trade a derivative product with another entity when there is not a market for it. Yes I agree it is an expensive way and inefficient and extremely risky (for the individual investor who supposedly wants to get into this "exclusive club") way to trade something because there is no clearinghouse, no guarantees of anything so basically the 2 parties are assuming all the counterparty risks and us individual investors are not the only one who can be a counterparty risk. Imagine you enter an ISDA agreement with Lehman Brothers just before the 2008 financial crisis and yet us individual investors would not have the means to demand for them to put up more collaterals or high quality collaterals for the agreement because they were the "BIG Banks" and we are the individual traders who are just "privileged" to trade with the "Big Boys". And when s*** hits the fan, we would've been the ones holding the bag with zero recourse since there is no any market for it and there is no way you can offload the ISDA agreement; you can't turn around and sell the ISDA agreement; you are all stuck and stand to lose everything. But when we are perceived as posing the "counterparty risk", those "Big Banks" can charge up to 3 times the cost to enter those ISDA agreement with us when they have trillions of dollars of assets to absorb any potential losses. It's supposed to be a bilateral agreement but really it's an unilateral agreement in many ways in that the individual investor is under-compensated for the risk and would only win when the odds are OVERWHELMINGLY in the individual's favour ASSUMING the "Big Banks" can pay up. So the payoff is really like one big giant call option with no expiration where we the individual investors pay huge hefty cost upfront in addition/including collaterals for the chance of winning huge profits only when the market goes our way in the distant future but when it doesn't, then the payoff is just flat for us and there is no one to spread the risk with.
Could be 2008 is really the reason there are so few of these left, everyone realized the risk adjusted return just wasn't there when tail events were taken into account.