Outline Risk in Derivatives Markets CASE 1 — MG case

Presentation on theme: "Outline Risk in Derivatives Markets CASE 1 — MG case"— Presentation transcript:

0 Case Studies of Large Losses in Derivatives Markets
Derivatives Debacles Case Studies of Large Losses in Derivatives Markets Anatoli Kuprianov 財研一 粘逸尊 R 財研一 林慧華 R

1 Outline Risk in Derivatives Markets CASE 1 — MG case CASE 2 — Barings case Conclusion & Comments Other Reference

2 衍生性金融商品真的有如洪水猛獸這麼可怕嗎?
全球操作衍生性金融商品重大失利案件摘錄 時 間 公司名稱 操作商品 損失金額 1993.3 英國里昂聯合公司 外匯交易 1.5億英磅 能源產品相關衍生性商品 15億美元 德國石油公司 Metallgesellschaft 1994.4 美國寶鹼公司(P&G) 利率交換 1.6億美元 美國加州橘郡 16.9億美元 浮動利率票券 不動產抵押證券投資 1995.2 英國霸菱銀行 日經225指數期貨及選擇權 14.7億美元 1995.9 日本大和銀行 美國公債 11億美元 1998.9 LTCM 25億美元 主要工業國家公債 及各種衍生性商品 衍生性金融商品真的有如洪水猛獸這麼可怕嗎?

3 Risk in Derivatives Markets
Four basic kinds of risks Market Risk ( Price Risks) Operational Risk Counterparty Credit Risk Legal Risk

4 CASE 1 — MG case

5 Metallgesellschaft Refining and Marketing(MGRM)
CASE 1 — MG case Metallgesellschaft Refining and Marketing(MGRM) 公司組織：德國大廠Metallgesellschaft AG的美國子公司 經營範圍：熱油、天然氣、油製品的提煉、行銷、遞送 事件背景：油品價格隨季節變化劇烈，成本控制不易 事件主角：CFO －W. Arthur Benson 操作標的：Futures －front-month contract on NYMEX Swaps －receive floating and pay fixed price 最後結果：損失約$1.3 billion

6 if oil price of futures market rises above the contract price
CASE 1 — MG case MGRM’s Marketing Program Firm-Fixed & Firm-Flexible Programs MGRM supplies a fixed monthly deliveries of oil, gasoline, and heating oil at a fixed price to contracted customers. In Common： Cash-out provisions ( options for early termination ) The Main Difference in Cash-out provisions： The firm-fixed contract： ( Current nearby futures price－the contract delivery price) × 50％ The firm-flexible contract ： ( Second-nearest futures price－the contract delivery price) × 100％ Other Difference： A customer could request 20％ of its contracted volume for any one year with 45 days’ notice. (Firm-Flexible) if oil price of futures market rises above the contract price

7 CASE 1 — MG case Illustration of the supply contract and the cash-out option retailer faces a liquidity crisis

8 CASE 1 — MG case The cash-out proportion is 50%：
the retailer gets 120,000* 10 * .5 = $600,000 This allows the retailer to obtain cash in a liquidity crunch.

9 CASE 1 — MG case Hedging Strategy
MGRM’s contract price reflected a premium of $3 to $5 per barrel. Hedging Strategy Oil prices ；the firm could suffer massive losses. “stack-and-roll” hedge : buy a combination of short-dated oil futures contracts and swaps.

10 Contango vs Backwardation Market
CASE 1 — MG case Contango vs Backwardation Market Forward Price =Spot price ＋Cost of Carry－Convenience yield If Cost of Carry＞Convenience yield If Cost of Carry＜Convenience yield A stack-and-roll strategy appeared to offer a means of avoiding such carrying costs because short-dated futures markets for oil products historically have tended to exhibit backwardation. Contago Market；F ＞S Backwardation Market；F＜S

11 CASE 1 — MG case Basis Risk
Illustration of the hedge strategy when the market is in backwardation

12 CASE 1 — MG case Basis Risk
Illustration of the hedge strategy when the market is in contago

13 The process of huge losses in derivatives market
CASE 1 — MG case The process of huge losses in derivatives market What happened if oil prices fall? (in late 1993) Cause funding problems for MGRM Cancel its long-term contracts with its customers Terminate its hedging program Why? 1.The practice in futures markets of mark-to-the-market and margin calls. 2.Short-term energy swaps matured, MGRM was forced to make large payments to its counterparties. 3.Most offsetting gains on its forward delivery commitments were deferred. 4.NYMEX raised its margin requirements for the firm. Cause about $1.3 billion loss

14 Critiques of MGRM’s Hedging Program
CASE 1 — MG case Critiques of MGRM’s Hedging Program Edwards & Canter and Mello & Parsons Assume that the likely future behavior of basis in oil futures and forward markets is backwardation. The permanent changes in the behavior of basis are possible or not ? Edwards & Canter said “Yes” Huge losses Mello and Parsons are more critical of MGRM’s hedging program. They thought that it was speculative in its design and intent. 2. MGRM’s was overhedged. Short-term oil futures prices tend to be more volatile than prices on long-term forward contracts.

15 Defense of MGRM’s Hedging Program
CASE 1 — MG case Defense of MGRM’s Hedging Program Culp & Miller and Culp & Hanke The hedger bears no carrying costs as long as the market exhibits backwardation. Culp & Miller’s analysis shows that changes in basis affect only the portion of carrying cost borne by the hedger. Culp & Miller argue that any long run expected losses due to basis risk were minimal considering historical patterns of backwardation in energy market.

16 Defense of MGRM’s Hedging Program
CASE 1 — MG case Defense of MGRM’s Hedging Program Culp & Miller and Culp & Hanke 2. Underestimated the value of MGRM’s contracts with its customers. Take proper account of unrealized gains in the value of contracts 1.3 billion 170 million Most of MG’s reported losses were due to the termination of its subsidiary’s marketing program.

17 Defense of MGRM’s Hedging Program
CASE 1 — MG case Defense of MGRM’s Hedging Program Culp & Miller and Culp & Hanke 3. The firm should continue the hedging program. Consider losses from MGRM’s hedging program to be sunk costs. Culp & Miller find out the program had a positive expected net present value at the end of 1993. The firm could have bought options to remain hedged while it sought solutions to its longer-term funding problems. The Deutsche Bank was not only a creditor to MG but also one of its largest shareholders, therefore it should have been willing to continue financing MGRM’s hedge program.

18 Response of the CFTC CASE 1 — MG case MGRM MG Futures, Inc.
material inadequacies in internal control systems associated with MGRM’s activity in energy and futures markets material inadequacies in internal control systems associated with MGRM’s activity in energy and futures markets Selling illegal, off-exchange futures contracts Failing inform the CFTC of these material inadequacies The CFTC’s action rendered MGRM’s firm-fixed agreements “illegal and void”. The CFTC’s action would have created legal risk for MG. Miller and Culp criticized that CFTC’s action created uncertainty about the legal status of commercial forward contracts.

19 An Overview of Policy Concerns
CASE 1 — MG case An Overview of Policy Concerns MGRM’s huge losses are attributable more to operational risk than to market risk. There is no need for new government policies or more comprehensive regulation of derivatives markets. Systematic attempts to discourage such arrangement like the long-term, fixed-price delivery contracts would seem to be poor public policy.

20 CASE 2 — Barings case

21 Barings Bank (oldest merchant bank in Great Britain)
CASE 2 — Barings case Barings Bank (oldest merchant bank in Great Britain) Background：1994~1995 ,around Kobe earthquake Character ：Nick Leeson －Wonder boy, Turbo arbitrageur Operations ： Nikkei 225 Futures between OSE & SIMEX JGB (Japanese Government Bond) Nikkei 225 Futures Call & Put Options Result ：Loss ￡927 million ，Barrings bankrupted

22 CASE 2 — Barings case Who is Nick Leeson?
Operations in Morgan Stanley and Barings Accomplishment in Jakarta Branch Manager of BSS (Barings Securities Singapore) Take necessary exam in back office Transacting futures and options orders for clients Arbitraging Nikkei futures price between SIMEX and OSE General manager, head trader, head of back office, affluent experience

23 Unauthorized Trading Activities
CASE 2 — Barings case Unauthorized Trading Activities Arbitrage in Nikkei-225 futures and 10-yr JGB Short Straddle Strategy - sale of Nikkei-225 futures options Long position on Nikkei stock futures Kobe earthquake，1.23 Nikkei slumped 1500 pts Long Nikkei-225 futures，attempt to pull up the index Nikkei fell again  enormous margin calls (742 mn) Everything is out of control!!

24 The most expensive “I’m sorry!”
CASE 2 — Barings case The most expensive “I’m sorry!” “My sincere apologies for the predicament I have left you in. It was neither my intention nor aim for this to happen.” Total loss : 927 million (Barings Equity 440mn) ING buy : ₤ 1 Recapitalize :660 million

25 Criticism: Over confident Leeson
CASE 2 — Barings case Criticism: Over confident Leeson Huge position of market open interest Nikkei futures options values are 10 times of the bank’s capital size 61000 Nikkei futures contracts, 49% of Mar , 24% of Jun of 1995 Short JGB futures, 88% of Jun 1995 Short Euroyen futures, 5% of June, 1% of both Sep and Dec 1995 Special account Year 1992 1993 1994 1994 acc. Loss(mn) 2 21 185 208

26 Criticism: Barings’s management
CASE 2 — Barings case Criticism: Barings’s management Support additional funding without inquiry Didn’t prompt immediate inquiry to Leeson’s activities. Tony Hawes started investigating on Feb 6. Assurance to SIMEX on the belief of Leeson’s “Hedging Strategy”. Improper system and inadequate internal control No supervisory mechanism for BSS. Lack of segregation of front and back office. Lack of funding management institution. Lack of market risk and operational risk management.

27 CASE 2 — Barings case Criticism: SIMEX System of clearinghouse
SIMEX doubled the margin calls on Nikkei stock index futures. BFS (Barings Futures Singapore) – the largest clearing member. Inexperienced dealing with insolvency of clearing member. SIMEX didn’t have the detail information on individual account. Leeson provided false information of Barings’s account. Insufficient communication between exchanges Disclosure of unusual large position. Confirm the position of hedging dealers.

28 Policy concerns highlighted by Barings’s default
CASE 2 — Barings case Policy concerns highlighted by Barings’s default Windsor Declaration (May 1995, Windsor England) Calling to prompt National provisions and market procedures that facilitate the transfer of funds from failing members. Enhance emergency procedures. Improving the existing mechanism for international co-operation and communication among market authorities and regulators. International Organization of Securities Commissions Endorsed the Windsor Declaration. Ask members promoting measures in cross-border transactions.

29 Policy concerns highlighted by Barings’s default
CASE 2 — Barings case Policy concerns highlighted by Barings’s default Futures Industry Association (FIA) Organized measures to improve the integrity of futures and options exchanges. Published 60 recommendations from risk management to customer protection. Encouraged nations to modified their laws when facing bankruptcy. Galvanize international efforts jointed by government officials and market participants. Reevaluate risk management, failing of clearinghouse.

30 Lessons from the Barings debacle
CASE 2 — Barings case Lessons from the Barings debacle Careless about the warning signs Lack of segregation of duties between front and back offices. High level of funding requested by Leeson. Unreconciled balance of funds transfer to BFS to meet margin calls. High profitability is relative to high level of risk. The discovery of discrepancies in account by outside auditors. Communications from SIMEX. Market rumors and concerns. On-site examination of Leeson’s account came too late. Management teams have duties to fully understand the plans.

31 Lessons from the Barings debacle
CASE 2 — Barings case Lessons from the Barings debacle Criticisms for the Bank of England’s supervision 25 percent of the organization’s capital to the risk or loss. Increasing understanding of the non-banking business. Explicit internal guidelines . Closer work to the Securities and Futures Authority is needed. Falling at Barings were not a consequence of the complexities of the business. Legitimate concerns for policymakers Lack of communication between securities and futures. Conflicting laws on the legal status in the event of insolvency.

32 Conclusion & Comments Firm’s management should understand fully and well monitor the activities of their subsidiaries. Derivatives are not devil. Derivatives-related losses doesn’t mean more regulations of derivatives markets needed. Operational strategies, not only derivatives, can lead to loss money. Attempts at stringent regulation can sometimes have undesirable side effects.

33 Conclusion & Comments Market discipline is also a powerful form of regulation. Derivatives enlarged the market size and stimulate the competition and innovation of financial markets. Derivatives provided diverse solutions to funding policies, such as hedging, speculation and fund gathering.

34 補充資料 目前我國銀行交易之衍生性金融商品種類 (一)店頭市場(OTC) (一)店頭市場(OTC) (一)店頭市場(OTC)
利率有關契約(Interest Rate Contracts) (一)店頭市場(OTC) 1.遠期利率協議(FRA) 2.換利(IRS) 3.買入選擇權(Bought Options) 4.賣出選擇權(Sold Options) (二)交易所(Exchange-traded Contracts) 1.期貨-長部位(Futures - Long Positions) 2.期貨-短部位(Futures -Short Positions) 匯率有關契約(Foreign exchange Contracts) (一)店頭市場(OTC) 1.遠期利率協議(FRA) 2.換利(IRS) 3.買入選擇權(Bought Options) 4.賣出選擇權(Sold Options) (二)交易所(Exchange-traded Contracts) 1.期貨-長部位(Futures - Long Positions) 2.期貨-短部位(Futures -Short Positions) 權益證券有關契約(Equity-linked Contracts) (一)店頭市場(OTC) (二)交易所(Exchange-traded Contracts) 商品有關契約(Commodity Contracts) (一)店頭市場(OTC) (二)交易所(Exchange-traded Contracts) 資料來源：中央銀行

35 補充資料 目前我國銀行交易之衍生性金融商品交易情形 註：1.統計內容為本國銀行國內總分支機構及外國銀行在臺分行
單位：新臺幣億元 88年 89年 90年 91年 92年 註：1.統計內容為本國銀行國內總分支機構及外國銀行在臺分行 2.本表已剔除銀行間交易重複計算部分。 資料來源：中央銀行統計資料,作者製表

36 補充資料 節錄”銀行辦理衍生性金融商品業務應注意事項” (台財融字第84711569號函 )
三、銀行董（理）事會對本銀行辦理衍生性金融商品業務應本下列原則加強監督管理： (一) 銀行辦理衍生性金融商品業務應先評估其風險與效益，並訂定經營策略及作業準則報董（理）事會核准後施行，修改時亦同。 (二) 董（理）事會應定期評估本項業務之績效是否符合既定之經營策略及承擔之風險是否在銀行容許承受之範圍。 四、銀行辦理衍生性金融商品業務應訂定之作業準則，其內容至少應明訂左列事項： (一) 業務原則與方針， (二) 業務流程， (三) 內部控制制度， (四) 定期評估方式， (五) 會計處理方式，以及 (六) 內部稽核制度。 資料來源：財政部金融局全球資訊網

37 補充資料 五、前項作業準則之內容應包括下列風險管理措施：
(一) 風險管理應包含信用、市場、流動性、作業及法律等風險之管理。 。 (二) 銀行辦理衍生性金融商品業務之交易及交割人員不得互相兼任，其有關風險之衡量、監督與控制並應指定專人負責。 (三) 銀行辦理衍生性金融商品業務應視持有交易性部位多寡與市場變動情形，採即時或依每日市價評估為原則，惟至少每週應評估一次；若為銀行本身業務需要辦理之避險性交易至少每月應評估二次。其評估報告應呈送董（理）事會授權之高階主管。 (四) 負責風險之高階主管如認為市價評估報告有異常情形時，應即向董（理）事會報告，並採取必要之因應措施。 七、銀行辦理衍生性金融商品業務時，應於財報表本身或附註內依金融商品之類別至少揭露下列事項。 (一) 面值或合約金額（如無面值或合約金額，則應揭露名目本金金額）。 (二) 商品性質及條件（至少包括商品的信用及市場風險、商品的現金需求及相關的會計政策）。 資料來源：財政部金融局全球資訊網

38 補充資料 節錄”公開發行公司從事衍生性商品交易處理要點” (91年12.12廢止 台財證一字 第 0910006113 號函 )
(91年12.12廢止 台財證一字 第 號函 ) 三、適用範圍 (一) 本要點所稱之衍生性商品，係指其價值由資產、利率、匯率、指數或 其他利益等商品所衍生之交易契約 (如遠期契約、選擇權、期貨、交 換，暨上述商品組合而成之複合式契約等) 。 (二) 本要點所稱之遠期契約，不含保險契約、履約契約、售後服務契約、 長期租賃契約及長期進 (銷) 貨合約。 (三) 公開發行公司從事債券保證金交易應比照本要點規定辦理。 四、從事衍生性商品交易應辦理事項 (一) 擬訂處理程序 (二) 資訊公開 (1) 上市、上櫃公司應按月將本公司及其子公司截至上月底止從事衍生性商品交易(含以交易為目的及非以交易為目的) 之相關內容，併 同每月營運情形辦理公告並向證管會申報。 (2) 公開發行公司從事衍生性商品交易，其財務報告應行揭露事項由證管會另訂之。 資料來源：財政部證券曁期貨管理委員會

39 補充資料 五、從事衍生性商品交易應注意事項
(一) 公開發行公司應將從事衍生性商品交易之風險管理制度及會計處理納 入書面內部控制制度及內部稽核實施細則中。 (二) 內部控制 (1) 公開發行公司從事衍生性商品交易至少應採行下列風險管理措施： 本部份與”銀行辦理衍生性金融商品業務應注意事項”第五項大致相同。 董事會應依左列原則確實監督管理： 1.指定高階主管人員應隨時注意衍生性商品交易風險之監督與控制 。 2. 定期評估從事衍生性商品交易之績效是否符合既定之經營策略及承擔之風險是否在公司 容許承受之範圍。 (3) 董事會授權之高階主管人員應依左列原則管理衍生性商品之交易： 1.應定期評估目前使用之風險管理程序是否適當及確實依公司所訂 之「從事衍生性商品交易 處理程序」辦理。 2.市價評估報告有異常情形 (如持有部位已逾損失上限) 時，應即 向董事會報告，並採取必要 之因應措施。 資料來源：財政部證券曁期貨管理委員會

40 補充資料 (三) 內部稽核 (1) 內部稽核人員應定期瞭解衍生性商品交易內部控制之允當性，並按月查核交易部門對「從事衍生性商品交易處理程序」之遵守情形並 分析交易循環，作成稽核報告。 (2) 上市、上櫃公司應於次年二月底前將前項稽核報告併同內部稽核作業年度查核計畫執行情形向證管會申報，並至遲於次年五月底前將異常事項改善情形申報證管會備查。 資料來源：財政部證券曁期貨管理委員會

41 補充資料 節錄”公開發行公司從事衍生性商品交易財務報告 應行揭露事項注意要點”(台財證 ( 六) 字第 00263 號函 )
公開發行公司從事衍生性商品交易，於編製定期性財務報告 (含年度 、半度、季財報告及合併財務報告) …… 三 公開發行公司從事衍生性商品交易應於財務報表附註中彙編揭露左列事項： (一)一般性揭露事項： 公開發行公司從事衍生性商品交易應按持有或發行目的區分為交易目的及非交易 目的，並依商品類別於財務報表附註中揭露左列資訊 ： (1)持有或發行衍生性商品之目的。 (2)面值、合約金額或名目本金金額。 (3)衍生性商品之性質及條件，並至少應包括左列敘述 1 衍生性商品之信用及市場風險，包括損失發生之可能性及可能之損失金額。 2 衍生性商品之現金需求，包括影響未來現金流量之金額及時間等資訊。 3 相關之會計政策……… 資料來源：財政部證券暨期貨管理委員會

42 補充資料 (4)公平價值及相關帳面價值。交易之衍生性商品如有市場成交價時 ，應揭露市場成交價及
市價評估淨損益；無市場成交價時，應揭露最佳估計值及其使用之估計方法與重大假 設；如無法合理估計 公平價值，應揭露無法估計之理由及與估計公平價值相關之資訊 (如帳面價值、實質利率、到期日等資訊) 。 (三)非以交易為持有或發行目的之衍生性商品，除一般性揭露事項外，應額外揭露左 列資訊： 1 有助於了解持有或發行衍生性商品目的之背景說明及如何達成其目的(包括避險所使用之 生性商品種類) 之敘述。 2 凡持有或發行衍生性商品以規避已持有資產或負債之風險者，應再彙總揭露左列資訊： (1) 被避險之已持有資產或負債金額及所用衍生性商品種類之敘述 。 (2) 已認列及被明確遞延之避險損益金額。 3 凡持有或發行衍生性商品並以規避預期交易(包括確定承諾之未來交易及不具承諾但預測 即將於未來發生之交易) 風險方式列帳者，應彙總揭露左列資訊： (1) 被避險預期交易之敘述，包括預期交易預期發生之期間。 (2) 規避預期交易風險所用衍生性商品種類之敘述。 (3) 被明確遞延之避險損益金額。 資料來源：財政部證券暨期貨管理委員會

43 Lesson’s Short Straddle strategy
CASE 2 — Barings case Lesson’s Short Straddle strategy Short Call Short Put 18500 20000 Short Nikkei calls and Nikkei puts Total contract volume ：6.68 billion Barrings’s capital size ：615 million

44 CASE 2 — Barings case Sufficient funding support from Barrings group

45 CASE 2 — Barings case Barrings group’s merger in 1993

46 CASE 1 — MG case