Manufacturers Hanover

The swap market and ISDA were formed in 1985 at the time when Mike Lewis (Bloomerg, NYT) published his "guide to bankers" 

- Liars Poker.

This, with Michael Douglas' Gordon Geko and Dani de Vito's Other People's Money, the scene was set.

The players were -

• Salamon (later to join Citibank)

• Bank of America

• BNPParibas, as now named

• Morgan Stanley (post Glass Stegall separation from JPM)

• Manufacturers Hanover

• Chemical

• Merrill Lynch

• Lehman (bigger things to come, in 2008).

• Drexel (Michael is out of jail now, and is in education).

• Bankers Trust (now absorbed into Deutsche Bank).

We wrote the valuation models on Lotus 123 and IBM PCs.

Then Hammersmith & Fulham, the only real challenge there has been to swaps, and the ISDA, in law courts. By setting up local council CFOs to trade swaps, they won if the rates went up and won if they went down. Everyone won, until the rates spiked and the positions closed out.

At High Court, it was deemed that the trades were Ultra Vires (not enforceable), following expert testimony that the strategy, taken to it dynamic conclusion, was, in effect the purchase of a Rates Option, from the Councils, while withholding the due premium.

Note that the strategies proposed in G77 shortfall protection are , effectively the sale of a dynamically constructed option on FX, without charging the full premium due, which IS ENFORCEABLE. Effectively a partial premium as a gift. By this means, the G77swap manufactures shortfall protection, or more specifically the shortfall insurance, the FX CCDS, which is an option. G77swap are offering discounted FX CCDS, or credit shortfall insurance by the time tested method of "volatility manufacture and extraction". This is cross-gamma trading, or the manufacture and extraction of volatility in two variables, the FX and the counterparty default credit.

The G77swap trading book runs -

• counterparty credit standing (a proxy for Credit Rating in G77 markets), known as the "Hedge Ratio", typically (80% to 50%). These being sub-investment grade (AA-) to close to default (C-).

• Counterparty credit yields and shorts. 

• FX volatility. Note that over the last decade, FX trading rates have been compressed by a factor of 100, making main market FX volatility, free to replicate.

Typically, -

• Hedge Ratio resets quarterly, 

• credit resets monthly and 

• FX is real-time. 

This latter, compensates for much of the inefficiency in the first two parameters, and cheap out of the money options are easily available when risks spike.