Although vanilla FX might have become the key pillar to build investment banking businesses, there are also more rinky dink products for those who want bigger thrills. Often, bigger thrills equates to bigger risk and bigger profits; at times, bigger thrills also equates to bigger spills, especially when marked-to-mid turns out to be more marked-to-myth, which is a phrase I’ve purloined off my credit colleagues at Euromoney.
I believe that the readership of this column is generally smart, and also highly cynical. I don’t believe that it merely wants to read regurgitated press releases about the latest knob that’s been added to this or that platform, or how wonderful someone’s business must be because it’s had a record day in some currency nobody else trades. Reporting bad news is very much part of the job.
As we all know, there are numerous rumours about various banks taking big hits in options. Last week, I reported the sudden departure of Tim Carrington from Merrill Lynch and I believe that issues over revaluation certainly played a part, even if Merrill insists it has had a record quarter in currencies.
I’m sure now, what with the subsequent events that have led to Osman Semerci, the bank’s head of FICC, exiting through the same revolving doors, Merrill will be glad of the practice it got last week.
The global head of FX at another institution reacted to an enquiry I casually dropped into the middle of an e-mail conversation. “Someone just phoned me and asked if I’d heard that you’ve dropped a bollock in options? Filtering the rumours is all part of the job. Obviously I will sniff around, so if it is true, you have a nice heads up to get the spin on it.”
He replied instantaneously. “We run large complex books so when the market goes nuts and correlations go to one, we do and did suffer. Most guys in complex exotics in any asset class have the same problem. We had macro hedges on that did help. With vols and riskies normalizing, things are back to normal and our options business is on track for a record year. I’m back in two weeks. You want to do lunch?”
For the moment, he’s killed the story. However, if I hear that his head of options is suddenly sacked, I’ll obviously revisit it, but not before he buys that lunch.
