This morning the Financieele Dagblad brought the frontpage news of Binck firing most of their risk managers. Five out of eight risk managers were shown the door, including the head of the department. They have allegedly broken some risk rules. Some of them have been working for the firm for over a decade ; that’s even before the full take over by AOT in 2004.

What did they do

Not really clear. FD reports the folks have been building up some riskless option positions, selling millions of option premium.  In some cases more than 2 million euro. The money was sheltered on a savings account at the bank. Profits amounted approximately a few tens of thousands. Bank lost because of an interest spread. Interesting stuff, journalists may not always connect the dots in derivatives – but these facts don’t sound like fiction.

Intraday trading violation

Employees also violated a certain intraday trading rule ; at some banks you can’t buy and sell the same security within 24 hours. This silly rule should block staff from frontrunning on customer orders. In reality they wouldn’t have the time to frontrun any order at all. Customers’ trade executions are within split seconds. No human could be fast enough. And second, those retail orders aren’t moving markets anyway. Market makers would love to see the retail order flow coming. Not to frontrun, but to trade against them.

In the afternoon the Binck spokesman pointed to the intraday trading violations. Really, no lower staff would be fired for breaking such petty rules. There’s no real benefit for them, no one would be harmed and a small penalty would do.

Reverse engineering

So, reverse engineering the situation at Binck. My best guess is the risk managers sold some deep in-the-money options on the AEX index. Somehow they have been able to circumvent the margin requirements and draw some interest at a savings account. A few dozen box spreads would generate millions of option premium. And millions of option premium would generate a few thousand euros if you can find a decent savings account rate. The margin requirements are fixed by the clearing, maybe long options can offset those margins. Anyway, risk managers should know the procedures. Interest arbitrage against your own employer, would be serious robbery.

Update

Here’s the full press release confirming the sack of five employees. Link.

Jack
Jack