Jerry del Missier reaped the rewards as derivatives moved to the heart of modern finance, then experienced the backlash when public opinion turned against the side effects of innovation.
After starting work at Scotiabank in his native Canada, del Missier joined Bankers Trust to work in derivatives products in 1988, when the firm already had a reputation for innovative structuring and aggressive deal chasing.
He recalls that employees used to joke that Bankers Trust attracted two qualities in staff – that they were very bright and unemployable elsewhere – in what turned out to be a harbinger of future reputational problems.
Personal highlights for del Missier include the creation of the first protected equity notes in Canada and deals that were among the first to use pre-paid forwards to fuse derivatives with corporate finance, enabling small firms to target much bigger competitors for acquisitions.
“I certainly remember the P&G transactions,” he adds, referring to the highly complex leveraged swap positions that Bankers Trust created for Procter & Gamble. These deals and others where Bankers Trust was accused of exploiting the naivety of corporate clients effectively marked the beginning of the end for the firm.
Bankers Trust was eventually sold to Deutsche Bank in 1998 but many of its best staff had already gone. Del Missier had moved the year before to join Bob Diamond at Barclays, in a bid to push the firm into the top ranks of investment banks.
“When I went to Barclays in 1997 it was to help implement a vision of an integrated cash and derivatives model when there were very few places that were like that,” says del Missier. “Most shops still had standalone derivatives products groups that wanted nothing to do with cash.”
He has some regrets about the loss of a unique derivatives culture that this entailed.
“The derivatives guys went from being the people who worked the longest hours on the trading floor to just another set of sales and trading staff,” he says.
An attempt to take business from bigger dealers by increasing electronic trading on the Barx system was central to the Barclays plan.
“I’m very proud of having led the charge on two things: derivatives clearing and then electronic execution, with transparency and two-way prices,” says del Missier.
“It certainly more than doubled our [swap] market share, with compound annual growth rates from 2003 on to 2005 and 2006 of 25% to 30%. We went from the lower half of the top 10 to number one in many markets,” he adds.
We were able to knock a few heads together to get market participants focused- Jerry del Missier
Del Missier remains an evangelist for shifting trading activity onto electronic systems, even when that involves sacrificing margins.
“In 30 years, I have never been involved in a market where greater transparency did not lead to greater volumes,” he says.
The growing adoption of Barx in the early years of the century seemed controversial at times. Rival dealers who were reluctant to see tighter bid/offer spreads highlighted that Barclays seemed to suffer from technical problems on Barx whenever markets were seeing turbulence, although they rarely cared to detail what prices they had been quoting on the phone themselves during the market turmoil.
“There were very different views on how clearing should be implemented, with some banks wanting to retain a competitive advantage,” says Moulds. “We were able to knock a few heads together to get market participants focused.”
Barclays looked like a relative winner in the aftermath of the 2008 crisis. After being thwarted in a bid to buy Lehman just before its failure, Bob Diamond was able to acquire its US operations for minimal cost after the default and expand further.
But while Ricci seemed the man most likely to enrage a banker-loathing public in the wake of the crisis by flaunting his wealth, it was del Missier who ended up being forced to resign alongside Bob Diamond in 2012 due to the Libor fixing scandal.
Today del Missier runs a fund called Copper Street Capital that looks for financial sector investments. One lesson he has learned from a long career while derivatives evolved across asset classes is the need to apply common sense to outputs from models, however sophisticated they may seem.
“You have to recognize the limits of models. I would say to [our] traders: ‘Mark all your correlations to one and the hit cannot be more than a month’s P&L,’” he says. This lesson might not survive the AI trading singularity, but it is probably a decent working rule for now.