Derivatives: Let's rip apart those triple-A subs

Derivatives: Let’s rip apart those triple-A subs

So far 13 banks and investment banks have created top-rated derivatives subsidiaries. In theory such a sub won't go bust, even if the bank does. The banks claim this makes them acceptable as triple-A counterparties for derivatives transactions with the world's most select clients. But how accepted are they? And what nasty shocks lurk in the small print when the going gets rough? David Shirreff investigates

A spectacular event in August 1996, apart from the Olympics in Atlanta, was the closure of two derivative product companies. The first, Fisher King Derivative Products (Fishco), a termination vehicle, was wound up when its parent Fisher King & Co fell below BBB investment grade.

That forced the termination of over 500 interest rate and currency swaps, caps, floors and other structures, with more than 200 counterparties, totalling over $100 billion in notional principal amount.

The market was hit by a wall of demand for close-outs within the next 10 days, during the least liquid month of the year.

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Derivatives: Let’s rip apart those triple-A subs

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