Repos? Why yes I used to trade billions of euros of them
Dear Reader,
I have watched with limited interest this week the screaming headlines about US Repos. Liquidity shortages causing financial lemmings to scrabble around for cliffs to jump off again. You think they would learn from past lessons.
It may surprise you to know I once traded huge sizes in repos (what hasn't he traded I hear you groan). I thought I should tell you the story of how I ended up having a personal repo line of 3 billion euros and had planned to make a career out of trading them until a 7's 20's yen box trade killed me off.
Back in the day I was an execution trader for one of the world's largest and most active hedge funds. I wasn't employed inhouse but to all intents and purposes I was an employee as I only had time to speak with them given the volume of work we used to do together.
One of the problems hedge funds like this had was that their funding costs were absolutely insane. They had such large positions that if they could do open market operations it would dramatically move markets. As an example the fund in question owned 60% of the cheapest to deliver 10 year bund government bond through various mechanisms. After hearing repeatedly that funding was one of the main reasons they had to limit trading I decided to try and get involved - my thinking was that if I could sort out their repo issues then I could clearly do more business going forward. It
Being quite well connected in the world of clearing and funding I put out some feelers. My thinking was that the Repo or funding market was effectively run like a monopoly by 5-7 main banks (JP morgan, Barclays, Morgan Stanley Deutsche etc) and that one of the second tier ones might be very interested in getting access to a multi billion hedge fund's collateral.
I was right. One of the largest European banks were very keen to develop a relationship and get into what had traditionally been a closed shop for the main banks. They had vast positions in european government bonds as well so there was going to be great symbiosis. What followed was three months of me flying backwards and forwards to their headquarters and many meetings with compliance and lawyers in London and Switzerland. What was key for me was that I would be the one managing the relationship between the two as I hoped to make some income from any deal we set up.
Somehow I managed to get all parties to agree to terms. The European bank would lend its name to the hedge fund effectively allowing them to trade at market rates in the open market thus saving fortunes on their funding. I would be the one operating as a broker in the market using the bank name as counterparty. The hedge fund would pay commissions on the trades and route all trades through me. The bank had first dibs on whether to take the trade on themselves or not depending on whether they cared in the specific bonds needed for the funding.
I was given the authority to trade up to 3 billion euros (with an option on extending that to 7 billion) in the bank's name on behalf off the fund in anything G7 and out to 6 months repo maturity. When I look back it seems insane that one guy with an idea managed to put all this together.
It was a perfect set up for the hedge fund. Anonymous funding and saving costs were a great chance for them to trade more. All this happened in the days before LCH repoclear - I suppose in some ways I helped create the market structures for this as when more people found out about it there was a much greater demand to level the playing field for non tier 1 banks and end clients.
I think I ended up trading around 80 billion worth of 3 and 6 month repos over the period before the hedge fund got caught offside in a Japanese trade and ended up having to close. This plus the fact my buddy at the fund moved on to work in a bank and his replacement preferred being fluffed up by the top banks. This is probably one of the main reasons why I am so wary of Japan if I think about it.
As a funny aside to this story I thought about rolling this anonymous structure out to other funds. My mate who ran a big investment bank in Canary Wharf organised for me to meet the guy in charge of what at the time was the biggest hedge fund with 40 billion under management. If you imagine that this could be geared up to 14 times they were possibly running 560 billion in positions. A lunch was organised with the guy and my friend's wife. I recall she rocked up at the Ritz in a full length fur coat and an electric car. He was known as a god in the markets even then so I was a little excited to meet him and make my pitch.
We were going to meet for foie gras and sauternes and a chat. This small guy with what looked like a bad Kevin Keegan perm rolled in and his opening shot was 'Don I have 9 guys work for me doing my repos and I frankly don't give a shit who knows what I am doing'. At least he paid for lunch. If you have watched the original Wall Street film you know the scene where Charlie Sheen says life comes down to a few moments. I can now look back and laugh at this and recall I had a raging hangover at the time and struggled a lot with the dry toast.
Have a superb weekend
Don
