I was talking at a couple of leading banking conferences over the past week and post-event discussions at both centred around the benefits of monitoring both gross and net positions. Allegedly, a large number of banks are still only monitoring the net positions – apparently, it is more commonplace than you would expect!
Admittedly my exposure to the front or back office of a bank these days is very limited but I find it astonishing that this is the case. It’s important, if not vital, that you reconcile both, monitor, and understand both the gross and net positions.
The discussion took me back to the mayhem that I caused in Singapore. I’ve always maintained that there was never a plan and believe me there wasn’t. It wasn’t a carefully implemented plan of ‘organisational arbitrage’ it was simply a case of living minute-by-minute and surviving in exactly the same way. Over time, this time window extends out as you discover that the level of surveillance is negligible, if not totally non-existent.
Towards the end of 1994, I had £600m of additional margin with me in Singapore. This from a bank whose entire capital base was in the region of £250m. As you can imagine, by looking at the numbers, it was difficult, if not impossible, for the bank to allocate funding to any other part of the bank. Virtually everything was allocated to Singapore.
At ALCO meetings, Ron Baker, the head of the Debt products Division would come under pressure to return some of this additional funding back to London. I would get phone calls from Ron in the early hours of the morning asking me – probably a little bit more aggressively than that – to transfer some monies to the Group Treasurer back in London.
My illegal trading account, 88888, was already massively in loss-making territory – there was no point unwinding a trade, just to materialise a loss and then sell more options to hide the loss in the 88888 account. BUT London needed money returned and if I wanted to keep them off my back for a little longer, then I had to return money.
I hadn’t really thought about it much before, but the Singapore International Monetary Exchange, only looked for one piece of information at the end of the trading day – the final long position. As much as each trade was entered with an opening or closing identifier, this was never truly monitored by the exchange. If we bought 10,000 contracts over the course of the day and sold 5000 contracts, there were 5000 possibilities for the final long ranging from 1 to 5000.
Without being too stupid and throwing out a number that wasn’t possible (in the above example, 5050 as the final long) I could offset at the exchange, as many positions as I possibly could, client vs. proprietary and reduce my margin deposit at the exchange. I could then do what Ron Baker really wanted and return some margin to the exchange.
My illegal trading account was somewhere in those gross positions, you need to look at both.