Goldman, Dresdner, the hedge fund and the barrier: The weeklyFiX
It was therefore not a major surprise when spot EUR/SEK moved towards a significant barrier that was known to be in place at 9.1500 on July 5. In a research note sent out the day before, Lehman Brothers advised its clients: "There is a big barrier at 9.15 EUR/SEK that still is defended. Once broken we could head lower quickly and aim for 9.1180."
Market sources say that this particular option was initiated by Drawbridge, part of the US-listed Fortress Investments Group. Drawbridge has declined to comment on what it believes subsequently went on, although it is believed to have threatened legal action. When it took out the position, Drawbridge was using Dresdner Kleinwort as its prime broker. By the time of expiry, it had switched to Deutsche Bank, which then had to assume the role of barrier agent and decide whether the level had been breached or not.
Several banks were tasked with defending the level, including Goldman Sachs. These are believed to have been bidding 9.1515. There were several aggressive sellers trying to knock it out, including Dresdner; like everyone else involved in this tale, Dresdner declined to comment. Goldman Sachs is said to have bought so many euros that many of its bilateral credit lines were filled up. That might explain why even though it was still bidding in the market, EUR/SEK went 9.1495 offered on Reuters just before the option’s expiry. Although the rules of what constitutes a barrier event are not always clear or consistent, the simplistic view is that if a market amount is traded through it, then it is knocked out.
However, on July 5, two other banks were also bidding 9.1515. "There was a big binary at 9.1500. A German bank had interest to trigger it, as did a big US one. The German tried to trigger 9.1500 just before the expiry time. 9.1495 was given but I was bidding 9.1515 and a Danish (bank) was bidding too. We were not given when 9.1495 was seen," says a trader at one of large commercial banks involved. He added that there was nothing to indicate that his credit lines had been filled.
There have been incidents in the past when credit lines have been deliberately cancelled to trigger a barrier event. The refusal of all concerned in this story, including Reuters, to comment on what has occurred will ensure that the rumour mill keeps spinning and it does little for the FX market’s reputation.
"The whole way the market conducts itself [around barriers] is a major issue. Nobody wants to have a formal code of conduct and to some extent the banks are holding a gun to their own heads," says a senior hedge fund salesman in the light of what has happened.
An exotics trader at a top-five FX bank believes this latest saga will soon blow over. When asked if anything else had developed, he replied: "Just the threatened legal nonsense, but I’d be honestly happy if they did that as they’d have to disclose a lot of stuff into the public domain, and they ain’t ever doing that. So my view is it was one last chancing of their arm and this is the last we’ll hear of it."
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