Derivatives

CMRA's principals has been involved on the front line of every facet of the derivatives business from trading to risk management to new product development to origination to documentation to legal issues since 1983.

Ms. Rahl was an early pioneer in derivatives. Her team "invented" the collar and the swaption as commercial products. She built and ran Citibanks's cap and collar business from 1983-1985 and co-headed Citibank's derivatives business in the US from 1986-1991. She was on the ISDA Board for 5 years and chaired the committee that drafted the original 1987 ISDA Agreement and the committee that created the ISDA market survey. She a was profiled in both the 5th and 10th anniversary issues of Risk Magazine and Chairs the Risk Committee of one financial institution's board and is a member of another. Ms. Rahl is a member of the Board of Director's of the International Association of Financial Engineers (IAFE).

Ms. Lucas was the General Counsel to what was then known as Citicorp's Investment Bank, with responsibility for oversight of all legal and compliance functions in Citi's wholesale securities, commodities, derivatives, structured finance and foreign currency businesses in the U.S. and OECD countries.

In addition to Ms. Rahl's line management experience in derivatives and Ms. Lucas's line experience in the legal issues of derivatives, they have consulted on derivatives on all asset classes including interest rate, currency, credit, equity and commodity swaps and options as well as exotic underlyings including cell phones "pops,"

CMRA provides consulting as well as expert/litigation services related to all types of derivatives. Expertise includes valuation, best practices, governance and risk management of derivatives.

Ms. Rahl has been called the "Grandmother of Derivatives" and "The Red Adair" of Financial Engineering.

Selected Assignments in Derivatives

• Advised dealers, brokers, end-users, regulators and lawyers on both OTC and exchange traded derivatives (swaps, options and hybrids)
• Assisted clients in building derivatives businesses, selling and exiting derivatives businesses and advised on the creation of derivative
s product companies.
• Vetted many complex pricing models for global derivatives clients
• Conducted comprehensive reviews and risk diagnostics of both buy side and sell side firms
• Advised in the acquisition of a credit derivatives business
• Consulted re best practice for credit derivative swaps (CDS)
• Analyzed over 30,000 FX options and forward's and analyzed the cash flows in a major account for a large foreign dealer
• Developed derivatives guidelines for both buy side and sell side clients
• Advised on the unwind of an emerging market fund and valued over 100 derivative positions including total return swaps (TRS) and credit default swaps (CDS)
• Provided expert testimony on the complex commodity derivatives involved in Sumitomo's trading scandal
• Valued a portfolio of complex investments including derivatives for a major insurance company planning an acquisition
• Provided expert consulting in a merger regarding the valuation of an exotic option embedded in a purchasing contract
• Provided an expert report and testimony in a London based arbitration regarding interpretation of ISDA documents in the Russian debt crisis
• Provided expert testimony for a large European bank in an arbitration regarding the valuation and profitability of an unusually long term exotic option
• Provided expert testimony and analyzing in a Federal Court trials regarding FX options
• Provided an expert report and testimony in Federal Tax Court regarding a complex derivatives structure
• Provided an expert report in a inter-dealer dispute over interpretation of asset swap and repo agreements
• Conducted a comprehensive review of Banker's Trust's derivatives business commissioned by the Federal Reserve, SEC, CFTC and NYS Banking Commission

Selected CMRA in the Press re: Derivatives

 
Debtwire
Citibank responds, sues for breach of contract in credit default swap case
By Danielle Reed, New York

Citibank filed a response 23 April and countersued for breach of contract in its ongoing court battle with a hedge fund over a credit default swap.

Whatever the outcome of this particular case, the mere fact that such issues are being litigated highlights a source of concern to longtime derivatives market participants: Namely, the growing participation of hedge funds in the CDS market. "One of the things that has been of great concern to me for a long time is [the] many new entrants to the credit default swap market, especially hedge funds who have not cut their teeth on less complex over-the-counter derivatives...before taking on large sized positions in CDS," said Leslie Rahl, founder and president of Capital Market Risk Advisors. A pioneer in the derivatives market, Rahl said she is "pro-derivatives" but fears that "some of the newer players don't fully understand the differences between a liquid, transparent securities market and the world of over-the-counter derivatives."
(April 28, 2008)

Risk Management Decoded
By Liz Peek

"Risk management" has a nice ring to it. Not only does it suggest that a hedge fund team, for instance, has pretty much thought of all the things that could go wrong — it has also, bless its heart, managed those nasty surprises.

Leslie Rahl, founder and president of Capital Market Risk Advisors and a board member of Fannie Mae, has an excellent perch from which to view the unfolding of this latest debacle. According to her Web site, her company is "the preeminent financial advisory firm specializing in risk management, hedge funds, financial forensics, and risk governance."

Ms. Rahl graduated both from the Massachusetts Institute of Technology and its Sloan School of Management and was formerly head of Citibank's derivatives group. She actually understands all those complex formulas that are supposed to identify risk. Numbers are to Ms. Rahl as Cheerios are to the rest of us: uncomplicated and easily consumed.

Her take? "Risk management is all about thinking about two or three standard deviations from the mean. No one ever expects events to fall beyond that. Once in a lifetime events that fall outside that parameter have exponential, not arithmetic, consequences. Risk management is built around models, and models are built around assumptions. The models will work if things behave the way you model them to — but they never actually do. These events are somewhat expected, but we keep forgetting. You can't expect a computer model to anticipate changes. This is the big flaw — I keep reminding clients of this — that their assumptions are not the worst case."

"By definition, most risk people are young quants," Ms. Rahl said. Most, she said, do not carry their modeling back far enough to include similar events, such as the 1994 bankruptcy of Orange County, which she views as somewhat analogous to today's situation. "In 1994, the money funds broke the buck," Ms. Rahl said, referring to the unthinkable: a money market fund that experiences such credit issues with its portfolio that it no longer trades at a dollar. A similar deterioration in shortterm instruments occurred over the past two months, as a few money market funds got into trouble. The credit problems in the early 1990s stemmed from holdings of "inverse floaters" and the "kitchen sinks" — the names given to the leftovers of collateralized mortgage obligations after they had been sliced and diced and the higher-grade parts of the securities had been bought by savvier investors.

At the end of the day, we are reminded of the peril of investing in instruments so complicated that few could really understand them. "Even for me, who loves complex things, it's very complicated," Ms. Rahl said.

That's all we had to know.
(September 13, 2007)

The Synthetic CDO Shell Game Could the hottest market in all of fixed income be a disaster in the making?
By Bill Shepherd

"One of the questions people have to ask themselves is, how will these synthetic instruments behave in times of stress?" says Leslie Rahl, a former Citibank risk expert who now runs Capital Market Risk Advisors, a risk consultancy in New York. Normal risk modeling only approximates normal markets-the real test comes in extreme markets. And as Rahl likes to say, "We have a once-in-a-lifetime crisis every three or four years."

"If you want to get out early, it costs you," says CMRA's Rahl. "People don't fully understand the degree to which, if over-the-counter markets freeze up, there could be substantial differences between what a theoretical model tells you something is worth and where a buyer and a seller are willing to transact."

Even the skimpy historical record may be distorted by the ways that new entrants change market behavior. "There have been significant changes in how the credit markets work," notes Rahl. For instance, "the role of banks in working out bad credits has changed dramatically. Bondholders now play a much more significant role. So looking at data from the 1980s, probably there's little resemblance to the workout patterns and partners of today."
(May 16, 2005)

Derivatives Under Fire X

Around Wall Street, the potential for vilification of all derivatives is no small area of concern. "When there's a car accident, " asks risk management consultant Leslie Rahl, "do you blame the driver? Or do you blame the car?"

... few doubt that new derivatives abuses will sprout to replace them. Rahl, who runs Capital Markets Risk Advisors, says she's not a big believer in rigid rules governing derivatives practices. "Those only encourage creative financial engineers to work around them," she says.
(May 20, 2002)

Buffett Unit's Exodus From Derivatives Raises Questions

"There is no doubt that the less liquid and more exotic the derivatives position, the more subjective the estimate of value is. Clearly, that was an issue at Enron in some of their positions," said Leslie Rahl, president of Capital Market Risk Advisors Inc., a New York derivatives consulting firm.

She said derivatives is "a business you either have to be in with commitment, and willing to take the risks in return for the rewards that can be repeated and willing to grow it, or it's probably not worth the effort to do it in a small way, because you need a tremendous amount of infrastructure, whether you have one deal or thousands."
(May 10, 2002)

Cover Story: THE GLOBAL CRISIS: FINANCE
UP THE VOLGA WITHOUT A CALCULATOR
At this point, banks can't figure their their exposure
By Gary Silverman in New York

The banks had to say something. As their share prices crumbled in response to Russia's default on August 17th, financial institutions around the world have scrambled to come up with numbers for their Russian losses. And that raises a question: is that all there is?

Just as perplexing is how to account .for derivatives and hedge fund losses. Capital Market Risk Advisors estimates total Russian derivatives exposure could be $65 billion.
(September 14, 1998)

Grant's Interest Rate Observer
Making a model

"What Red Adair is to oil and gas exploration, CMRA is to financial engineering
(August 12, 1994)