Leslie Lynn Rahl, founder of the interest rate cap, collar and floor business and former head of Citibank’s interest rate risk management department, has formed Leslie Rahl Associates, a consulting firm that will specialize in interest rate, currency, equity, commodity, and municipal swaps and derivatives products. Her firm is the only consulting firm dedicated to the rapidly growing $3 trillion dollar swaps and derivative business. After receiving a BS in computer science from MIT, she received an MBA from the Sloan School and attended a special program on marketing management at Stanford. She has been extensively interviewed as an industry expert and has been widely quoted in Euromoney, Institutional Investor, Fortune, Barrons, Corporate Finance, Risk, Corporate Risk Management, the New York Times, and many other publications. She was featured in Institutional Investor’s “The Next Generation of Financial Leaders” and appeared in Fortune’s “On the Rise” column.

(December 1991)

In the forbidding corner of the Wall Street jungle known as the derivatives markets, where the locals are known as hard quants, rocket scientists or just plain nerds, Leslie Rahl is widely considered among the best of native guides for wary travelers.

(January 19, 1995) 

Capital Market Risk Advisors has a blue-chip list of clients, including dealers and end-users like banks, insurance companies, municipalities, corporations and mutual and pension funds.

(May 8, 1995)

Marking to model

”What Red Adair is to oil and gas exploration, CMRA is to financial engineering."

Reached by telephone last week, Rahl elaborated on the importance of understanding what makes derivatives valuation models tick. In public she dropped this amazing fact: 49% of typical swap customers' profits are recognized by marking custom-tailored derivatives 'to model', rather than 'to market'. (Frequently, of course, there is no quoted market to which to mark.) She said she based this number on a survey conducted by her firm. In other words, an important source of profit for swappers is the assumptions they make.

The source of 88% of the unanticipated losses from derivatives, she went on, is 'market discontinuity': cases in which the valuation model didn't keep up with a market that gapped or moved into unexplored territory. Further, in 61% of the cases of loss, Rahl said, the models were flawed, pure and simple. They didn't work even under ordinary market conditions.

Derivatives valuation models are complex and varied in design, Rahl continued, and there is room for art as well as science in them. Consider the problem of fashioning a model’s internal yield curve. Some practitioners connect the points with straight lines creating a jagged shape. Others use a mathematical gizmo called spline interpolation to take the jags out and connect the points with arcs.

(August 12, 1994) 

As the Competition for Business Intensifies, Minorities, Women Fight for Share of Pie

Minority and women-owned firms are making some inroads to the lucrative municipal derivatives market, but they have a long way to go before becoming regular participants.

“Issuers should be careful when structuring a swap about making or receiving end upfront payment,” swap consultant Leslie Rahl warned. “It can make a lot of sense, but it depends on the nature and magnitude of the transaction.”

(June 24, 1993)

Issuers Say That With Derivatives, Consultants Provide Vital Technical Advice

Leslie Rahl, now president of her own derivatives consulting firm, was the head of interest rate risk management at Citibank. Dealers, issuers, and municipal insurers have hired Rahl's firm, Leslie Rahl Associates, for derivatives advice.

An issuer or investor might ask Rahl's advice on a specific transaction or bring Rahl in to train employees. "We do training for people who might be using derivatives and want to know about the risks and benefits," Rahl said.

(November 16, 1993) 

Rahl to Consult on Muni Derivatives, Swaps

Leslie Lynn Rahl, formerly the head of Citibank's interest rate risk management department, announced earlier this week that she has founded a consulting firm specializing in municipal swaps and other derivative products.

Leslie Rahl Associates will be located in New York City and will offer consulting services on a full range of derivative products, including interest rate, currency, equity, and commodity swaps.

Ms. Rahl, noting dramatic changes in the traditional market over the last several years, said decreasing profitability has increased the market's emphasis on measuring returns and increasing operational efficiencies and controls.

"Intermediaries may find a knowledgeable and independent third party can help them succeed in this new business environment," Ms. Rahl said in a statement announcing her plans.

(June 24, 1991)

Trade Secrets --- Analyzing Corporate Currency Dealings Isn't Easy

Leslie Rahl thinks confusion is fairly common: "There are many senior managers of corporations who don't totally understand what has been done." Central bankers worry that even the people selling the products may not fully understand their risks. This year, a steady stream of warnings to that effect has issued from regulators in New York, London and Basel.

(December 28, 1992) 

Getting Risk’s number

VAR models contain inherent flaws. The biggest glitches surface on days when markets break free of normal patterns, smashing the neatly calibrated VAR volatility and correlation barriers. In recent months convulsions have racked both the CMO and structured-note markets, says Leslie Rahl, a risk consultant and a partner at Capital Market Risk Advisors: "During those market dislocations, the models Wall Street ran couldn't get a fix on what the value of the position was, let alone how much the value at risk was." Models can also be subverted by unexpected events. All VAR models assume that traders can safely exit any position within 24 hours. Markets, however, have a nasty habit of suddenly turning illiquid, as they did for many CMO holders last year.

(February 1, 1995)

The Risk Collectors

By 1983 dealers had begun mixing swaps with options to make an interest rate cap. This was new and uncharted territory. “You went to MIT - try this,” is how Leslie Rahl remembers being told that she would start the interest rate cap business at Citibank that year. An interest rate cap is a contract guaranteeing a corporation that has just borrowed money at a floating rate that its interest payments will not go above a certain amount. Theoretically, it is an option or, more precisely, a series of options, one for each interest payment.

The bank booked the business first and figured out how to hedge it later. “It was back-of-the envelope stuff,” recalls Rahl.  “We had a professor come in and run all the models for us.”  The pricing was outrageous. Bid-asked spreads on the caps were 100 basis points, compared with five to seven basis points now. And options with an implied volatility of as much as 40 percent were sold – although no one at Citibank was calculating volatilities back then. Some mistakes were made, Says Rahl, but “with prices at that, we had a lot of room for error.”

(September 1, 1991 )

Leslie Lynn Rahl was a director of Citibank’s interest rate risk management in the 1980s.

At Citibank, Ms. Rahl’s group of traders and originators created customized swap and derivative products: the group originated an average of 1,000 transactions annually totaling more tan $50 billion.

As a director of the International Swaps Dealers Association in the mid- and late-1980s, Ms. Rahl helped put together policy guidelines to standardize swap deals, making the market more efficient.

The firm is looking to provide independent risk oversight by bolstering the reporting of derivatives activities to senior managers. Also, Capital Market Risk Management will be testing portfolio stress and financial models for clients to check underlying assumptions on derivative pricing and profitability.

Despite highly publicized losses in derivatives products the principals at Capital Market Risk Advisors see them as a necessity for investors if they want to remain competitive.

(Sepember 6, 1994)

Banks Profit From Derivatives Although ‘Exotic’ Contract

Banks are still making big money in the $14 trillion derivatives market, even though losses suffered by some corporations have scared many clients away.

Derivatives can be used to make bets on market direction that will gain, or lose, money much faster than the underlying bond or stock. Most of the recent businesses, though, has involved corporations hedging against shifts in market prices that can eat into their profits, bank officials and analysts said.

“This has become a fundamental tool of managing a business,” said Leslie Lynn Rahl president at Capital Market Risk Advisors, a consulting firm. “That doesn’t just go away.” 

(July 22, 1994)

ORANGE COUNTY
"What CMRA found was far worse than anyone imagined. For years, the fund's..."

 (December 22, 1994)

Assessing Bond Values Gets Harder

Concern about how to properly price all these exotic securities has prompted lots of new business for Leslie Rahl, managing director of Capital Market Risk Advisors, which specializes in advising clients on such issues. "Our business has more than doubled" in the past year, she says.

In fact the problems in pricing are so widespread that Ms. Rahl has made the unorthodox suggestion that money managers segment their holdings into four categories by how difficult they are to price and set aside reserves against possible losses on securities whose prices are most intractable.

(June 13, 1994)

Big Brokerage Firms Enter Exotic, Risky Area By Providing Insurance to Mortgage Investors

The nasty tumble in mortgage securities is no secret today...

Leslie Rahl, a former Citibank derivative expert who runs her own consulting firm now, explains: "When someone is receiving payment of $20 million a year, it doesn't mean someone else is losing $20 million. These situations can be win-win." the brokerage firms "are likely to have other offsets in their derivative portfolios that have a countervailing impact," she adds.

(August 7, 1992)

“That meant he was making his own margin calls,” said Leslie Rahl, president of Capital Market Risk Advisors, a derivatives consultant.

Rahl argued, however, that losses of this magnitude rarely occur where adequate controls are exercised over traders.

“A lot of questions still need to be answered,” she said. “Was it a ticket-in-the-drawer situation (in which Leeson was not recording his trades on the firm’s books)? or were they poorly recorded and the firm’s risk mangement systems is not sufficiently robust? It’s not clear exactly where the weak link is, but there might have been multiple weaknesses.

(March 1, 1995)

Advisers: Orange County turns to a New York firm for expertise in handling its imperiled fund. The holdings may be sold for piecemeal

(December 8, 1994) 

Orange County Planning Investor Meetings Next Week

Orange County, California, officials said in a statement released Friday that they are planning to hold investor meetings next week after meeting Tuesday, December 6, with Capital Market Risk Advisors Inc.

Capital Market Risk Advisors has been hired by Orange County to help manage its investment pool.

“Orange County, California, is preparing for investor meetings next week after Tuesday meeting with CMRA,” the county said in the statement.

(December 2, 1994)

Derivatives not seen guilty in Orange County

NEW YORK - Despite reports attributing Orange County’s $1.5-billion dollar paper loss to derivatives, money managers and consultants said derivatives did not play a major role in the losses.

“The portfolio was $20 billion dollars face value,” said a spokesperson at Capital Market Risk advisors, the firm that has been hired to help Orange County reposition its portfolio.

“Of that, $11.5 billion was in traditional, classic fixed-income securities and about $8.0 billion in structured securities. Within that, we can’t get specific yet, but it appears to be misleading to say that it’s a derivatives loss”

Orange County said late Thursday that it had a preliminary paper loss of $1.4 billion because of rising interest rates. Reports have said that the fund had leveraged itself two to three times using repurchase agreements. Amid the structured notes, Orange County said about 80 percent were inverse floaters.

(December 2, 1994)

Public Finance / Washington Watch

Lehmans strips and pieces open mix-and-match options

The whole power of derivatives is the ability to mix and match, said Leslie Rahl, president of Leslie Rahl Associates and the former head of interest rate risk management at Citibank. The degree to which an investor can customize is very exciting. Its the trend for the 90s.

But Rahl, who had not reviewed strips and pieces in detail, added that a particular product trying to capitalize on this trend might not catch on with investors. The overall concept is important , but not every specific recipe will be a hit. Some are novel, most are minor variations, she said.

(April 5, 1993) 

WALL STREET SEES LAUNCH OF NEW DERIVATIVES ADVISORY FIRM

In risk there is reward.

Or so would say Leslie Lynn Rahl, the Wall Street professional who last week launched a firm called Capital Market Risk Advisors.

It is not the mortgage-backed instruments themselves that are causing the apparent kinks in the marketplace, but the application of those securities, she said.

What's more, the losses in derivatives and their effect on financial markets are clearly “exaggerated," Rahl said.

In pitching their firm, the strategists argued that investors should not shy away from using derivative products or decide to unload securities because of volatility or perceived volatility in their holdings.

Instead, they said that investors should be conducting the "appropriate analysis" to determine what is needed to protect a portfolio and meet financial objectives.

"The problem is that one should not just analyze the volatility of securities." The liquidation of some of the securities may cause greater volatility for the other investments in a fund, she said.

Do not ask if the derivatives are volatile, she argued. Rather, ask: "What is the overall volatility and what test do I have to run to be sure that I operate in those bonds?"

Rahl worked for nine years as director of Citibank's interest-rate risk management department, an 85-person unit she launched in 1983. Most recently, she has been running her own advisory firm.

Among the services of Capital Markets will be helping clients set up "reliable high-level reporting of their derivatives activities to senior management and outside directors," they said. "We will provide assistance to frame the proper classic portfolio diversification."

The healthy outgrowth of the recent scrutiny is that "clients are taking a more serious look at the controls" of their investments, Rahl said.

(August 1, 1994)
 

Swaps Suit Against BT Could Set Precedent

Leslie Rahl, president of Capital Market Risk Advisors, a New York consultancy specializing in derivatives, pointed out that the Gibson’s loss was already known so the news of the lawsuit won’t discourage anyone from buying derivatives.

“It doesn’t change the dynamics of the market,” Ms. Rahl said. “It’s news that they filed a lawsuit, but it’s not new news. If it was a new company that no one knew about”, she said, ”that might make a difference.”

(September 14, 1994)

As financial institutions continue to be downgraded, swap professionals are looking at a number of ways to protect against counterparty risk, including the use of insurance.

Leslie Lynn Rahl, president of Leslie Rahl Associates and a swap authority, stated: Although a small amount of securities has been insured, the number will continue to grow because of investors are becoming credit sensitive.

(November 25, 1991) 

Firms Seek Quick Derivatives Education

All the bad news about derivatives in the past week is good news for some.

A burgeoning cottage industry of experts is springing up to offer advice to harried treasurers and puzzled directors on how to handle these increasingly popular and complex financial products, which help companies manage, or take, risks.

Following last weeks announcement by Proctor and Gamble Co. that will take a $157 million pretax charge because of derivatives deals gone amok, business for the derivatives counselors is taking off.

“The phone keeps ringing off the hook,” says Leslie Rahl, a former banker who has become the derivatives adviser.

Three years ago Ms. Rahl left Citibank as co-head of derivatives to have a baby and to do some part-time consulting. She originally planned to work about three days a week for companies that were interested in the booming new business.

Now she needs a baby-sitter and is working “five, six seven days a week” because of the increased clamor for advice and counsel. Her six-person firm recently taught auditors at a large financial concern that uses derivatives what questions to ask and how to evaluate the appropriateness of derivatives policies and procedures.

(April 19, 1994) 

Orange County didn’t know how much trouble its investment fund was in until Leslie Rahl spent four weeks sorting it all out from both coasts last fall.

(May 8, 1995)