Inside the World’s

Most Elite (and

Secret) Traders’ Club
The nameless group confers “a hunting license”
that lets an investor sit at the “big boy table and
make high-level trades not available to stupid
amateurs.”
By
Alastair Marsh

In an industry where power and influence are measured in dollars and cents,
this may be the most exclusive club in finance: The price of admission is at
least $25 million.

It has no name and no board of directors but has a roster drawn from the
world’s wealthiest and most successful traders. Members essentially become
their own one-person firms, even firms within firms, by gaining a seal of
approval to deal in the complex products typically reserved for institutions
that manage hundreds of billions of dollars. And all without drawing the
attention of Wall Street’s everyday millionaires.

Their ranks are getting more selective. While no one keeps count, people in
the industry guesstimate that the total peaked at no more than 3,000 a decade
ago and has shrunk considerably since the financial crisis. Months of
interviews have yielded the identities of just 12 individuals who held the prize:
an ISDA master agreement.
They have included hedge fund titans Chris Rokos and Michael Platt, as well
as whales at Deutsche Bank AG and Goldman Sachs Group Inc., which became
clients of their own employers.

In the $542-trillion market for over-the-counter derivatives, ISDA

agreements set out the trading terms between two parties. In the vernacular of
Adam McKay’s adaptation of Michael Lewis’s The Big Short, they represent
“a hunting license” that lets an investor sit at the “big boy tableand make high-
level trades not available to stupid amateurs.” The firms that hand them out
gain access to the most desirable customers possible.

“Banks do this business because they can charge two or three times more than
they would a company,” said Manuel de Souza-Girao, a former senior wealth
manager at Deutsche Bank and Credit Suisse Group AG. “And it’s a good way
of attracting valuable clients.”

World's Most Elite Traders Club Has a $25 Million Minimum

World's Most Elite Traders Club Has a $25 Million Minimum
People such as Rokos, 47, who has a net worth of $1.2 billion, according to
the Bloomberg Billionaires Index. The British co-founder of Brevan Howard
Asset Management, who now runs his own hedge fund, was personally the
counterparty on ISDA agreements in 2013 when he set up a family office. That
meant Rokos himself was on the hook if the trades went against him.

Platt, 49, who runs BlueCrest Capital Management, also previously had a
personal ISDA agreement, said people familiar with the matter. Platt’s net
worth is estimated at $2.9 billion by the Bloomberg Billionaires Index.

“This is not a product rolled out to your average trader earning $2 to $5

million a year,” said Nelson Rangel, a former credit trader who is now the
chief investment officer of Raven Capital BV, an investment-management firm
for wealthy individuals. “It would be something for famous traders or
investors with significant personal wealth who would have no trouble posting
large amounts of collateral.”

Rokos declined to comment for this article, while Platt did not respond to
multiple emails seeking comment.
ISDAs are not only for celebrity investors. A cohort of lesser-known senior
bankers and fund managers who don’t appear on the front pages have used
the wealth and connections they’ve built up in the finance industry to gain
access.

Sofiane Gharred, 39, made his fortune trading credit derivatives. When
serving out a non-compete period in 2014 before starting his hedge fund
Selwood Asset Management, he signed an ISDA with Citigroup Inc. and traded
the riskiest portions of credit default swap indexes, according to people
familiar with the matter.

Gharred, who was born in Tunisia and studied in Paris, declined to comment
on his personal investments. He said he has not placed any personal trades
since starting Selwood in London in mid-2015 and that managing his own
capital “has never been a final aim.” Selwood grew its assets under
management to $1 billion in its first two years.

To trade swaps and other OTC contracts with Citigroup, an individual must
have a net worth of at least $25 million, $5 million or more of which must be
deposited in an account with the bank, according to people familiar with the
matter. Goldman Sachs and JPMorgan Chase & Co. require greater wealth, the
people said, although in most cases the guidelines can be tweaked for long-
term clients.

A spokeswoman for Citigroup declined to comment on the firm’s derivatives

dealings with individuals.

Pasi Hamalainen, a former managing director at Pacific Investment

Management Co. in California who retired in 2008 at 41 to raise his son and
race Bugattis, had ISDA agreements with Citigroup and Goldman Sachs,
according to a person familiar with the matter. The Finnish native, who was a
member of Pimco’s investment committee and head of global risk oversight at
the company, traded interest-rate swaps and currency derivatives with the
U.S. banks between leaving Pimco and joining Capital Group Cos. in 2012, the
person said. Hamalainen died in 2014.
Kieran Goodwin, the former head trader at King Street Capital Management,
traded with an ISDA between leaving the fund in 2010 and starting his own
firm in 2012, New York-based Panning Capital Management, according to a
person familiar with the matter.

Illustration: Isabel Seliger

Hedge fund manager David Peacock also previously had an ISDA, according to
people familiar with the matter. A spokeswoman for Peacock, who started his
career in JPMorgan’s pioneering credit-derivatives business in the 1990s and
is now a partner and co-head of corporate credit at Cheyne Capital
Management in London, declined to comment.

Wealthy individuals were something of an afterthought for the bankers and

lawyers that created the agreement for the International Swaps & Derivatives
Association, or ISDA, according to Jeff Golden, a former senior partner at the
law firm Allen & Overy. He was among the authors of the original 1987
agreement and all subsequent updates.

Derivatives are not just for speculation, though. After taking out a floating-rate
mortgage on a house in Kensington, London’s most expensive borough, Guido
Filippa signed an ISDA contract with Goldman Sachs to protect against rising
interest rates.

Filippa, 45, said he obtained the agreement via Goldman’s private-wealth

management unit while working as a managing director in the bank’s London
office. He entered into a 10-year interest rate derivative that required him to
pay an upfront premium of about 4 percent of the value of the mortgage, while
the bank is required to pay him every quarter that a benchmark of interbank
borrowing costs is above a pre-defined level.

Filippa, who left the bank in 2016, declined to comment on how much he paid
for his home. He said Goldman expected its staff to conduct their personal
investments with the bank for compliance reasons, and that the firm allowed
him to tailor the contract to his specific requirements. Goldman declined to
comment for this article, as did JPMorgan.

“I bought insurance against the leverage I took on against my house,” said

Filippa. “Only time will tell how much benefit I will get from the protection I
bought, but it allows me to sleep well, whatever happens to interest rates.”

It’s never been easy to get a personal ISDA agreement, but before the financial
crisis banks gave them out more freely, according to people familiar with the
matter. Rules created to prevent another crisis have increased capital costs for
lenders trading derivatives that are not processed through a clearinghouse;
what’s more, lawsuits that focused on mis-selling of derivatives prodded banks
to be more selective with whom they are willing to trade.

Billionaire real-estate investor Jeff Greene, who bet against U.S. subprime-
mortgage bonds, says he was told in 2006 by Merrill Lynch that he was the
firm’s first client to ever get a personal ISDA to trade credit-default swaps
wagering on a collapse in that market.
Spurning an offer to invest with his friend, hedge-fund honcho John Paulson,
Greene put on his own trades and said he made a profit of about $800 million
on a portfolio of credit-default swaps protecting against declines in about $1
billion of mortgage bonds.

Management subsequently ruled against a broader rollout because it was

almost impossible to track an individual’s total exposure to privately
negotiated derivatives trades, according to Cliff Lanier, a former director at
the firm who ran a team tasked with marketing fixed-income structured
products to high-net-worth individuals.

In some cases, bank employees have been able to obtain ISDAs to trade with
their employers, an arrangement typically facilitated by the bank’s wealth-
management unit. That was the case at Deutsche Bank, where senior
executives, including Raj Bhattacharyya and Boaz Weinstein, had ISDAs with
the bank while employed by the firm.

Bhattacharyya, who remains with the German lender and heads its emerging-
markets debt and foreign-exchange franchise in the Americas, declined to
comment, as did Weinstein, who left in 2009 to set up his own hedge fund,
Saba Capital Management.

“Deutsche Bank has strict personal-account dealing controls and procedures

in place to prevent conflicts of interest,” said Olayinka Fadahunsi, a
spokesman for the bank in New York.

Goldman Sachs has also traded OTC derivatives with a number of its senior
staff. John Wang, a former managing director in New York who ran the bank’s
market-making business for products tied to the VIX volatility index, is one
such example.

Wang, who now runs a macro fund in San Marino, California, said he was one
of a number of staffers to have ISDAs with the bank before he left. He said he
used the ISDA, which is still active, for equity-index and interest-rate option
trades.

“I got the ISDA because I’m a prop trader at heart and needed to be able to
invest and was pretty restricted on the desk in terms of what I was allowed to
invest in,” said Wang, who signed a separate agreement with Bank of America
Corp.

The set-up whereby a bank trades with its staff can create potential conflicts of
interest, such as when junior colleagues are leaned on to give their seniors a
good price on personal trades, which can be processed through the same desk
as client orders, according to people familiar with the matter.

Former employees can also use their institutional knowledge and relationships
to get an ISDA agreement. Simon Morris, who was Goldman Sachs’s head of
credit trading for Europe and the Asia-Pacific region until the end of 2016, is
one such example.

He set up a company in January last year to trade with his own money.
Boltons Place Capital Management Ltd., which shares the name of a street in
Kensington, has an ISDA with Goldman Sachs, according to a person familiar
with the matter. Morris declined to comment.

“It’s only the very upper echelons of the finance world that get this royal
treatment,” said Tze Tung Chong, a former derivatives executive at firms,
including Citadel LLC, who now invests in the contracts for his clients at
London investment firm Mons Capital Ltd. “You must be very wealthy; you
must be financially sophisticated. But perhaps most important of all, you need
to know the right people in the banks.”