"The agreements expressly absolved defendant (DBAG) from any liability for unauthorised trades by the plaintiff's agent. Indeed, as a general matter, the agent's knowledge and conduct would have been imputed to plaintiff at any rate, under basic agency principles."
"The law of the case addresses the potentially preclusive effect of judicial determinations made in the course of single litigation before final judgment"
"When parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms. Evidence outside the four corners of the document as to what was really intended but unstated or misstated is generally inadmissible to add to or vary the writing."
"The law contemplates fair dealing and not its opposite. Persons invoking the aid of contracts are under an implied obligation to exercise good faith not to frustrate the contracts into which they have entered. The rule is grounded in many cases that in every contract there is an implied undertaking on the part of each party that he will not intentionally and purposely do anything to prevent the other party from carrying out the agreement on his part."
"We, the undersigned, the directors of Sebastian Holdings Inc., (the "
"23. FXPB is essentially a clearing function (although others may refer to it as a credit intermediation function) offered by a bank to its clients to facilitate a client's trading activities on an agency basis. The bank permits the client to use the bank's interbank credit lines, enabling the client to trade directly with several executing brokers but consolidating all positions and risk with the bank (which acts as the FX Prime Broker). 24. In summary, the process of FXPB operates as follows: (a) a client enters into a trade with an executing broker in the name of the FX Prime Broker; (b) contemporaneously the client enters into an equal and offsetting transaction with the FX Prime Broker (these transactions are known as "give up" trades) and by so doing the bank takes a credit risk on the client in respect of which the client usually posts collateral with the bank; (c) the service enables the client to post a single pool of collateral with the FX Prime Broker rather than posting collateral with each executing broker with whom the client wishes to trade. This provides a valuable benefit to the client, not just because a single pool is more convenient but, because utilizing a single pool posted with the FX Prime Broker usually allows the client to trade against a lower amount of collateral, while still being in a position to negotiate terms and conditions with a number of different executing brokers. The amount of collateral posted is a matter for negotiation by the client with the FX Prime Broker (and all sorts of factors are relevant to this, including commercial considerations); and (d) the FXPB service is therefore a highly client demand-driven service. In exchange for the authority to trade in its name, the FX Prime Broker typically charges the client a fee per transaction. 25. The basic steps of the "give-up" process are as follows: (a) the client selects the FX trade it wishes to enter into. The sales/trading team at the executing broker negotiates the terms and conditions of the FX trade with the client (and may provide advice in this respect) and executes the FX trade on behalf of the client; (b) after the trade has been executed, the client notifies the FX Prime Broker of the trade details. The client provides this notification using automated or manual systems put in place with the bank; (c) the executing broker communicates the trade details to the FX Prime Broker; (d) the FX Prime Broker confirms matching details between the executing broker and the client. If there are any mismatches, the FX Prime Broker advises both the client and the executing broker of those mismatches; (e) the FX Prime Broker also enters into an equal and offsetting trade with the client so that its net exposure is zero and inputs the back-to-back trades; and (f) the FX Prime Broker clears and settles the trade on the settlement date. 26. The diagram below highlights the key steps in an FX Prime Brokerage give-up transaction: 27. It is apparent from the description I set out above that the FX Prime Broker is not providing any advisory service to the client: the FX Prime Broker does not even know what trades the client has entered into until the client informs it. 28. Rather, FXPB is a low-profit margin operationally-focused business where revenues are generated by the bank charging transaction fees for trades done with other executing brokers. It is a service business that takes no market risk and differs from FX trading, which is a business that revolves around taking market risk. The service is often offered to enhance the overall FX franchise and increase the amount of trading done with the bank directly. The FXPB department within a bank is operationally-focused group which may have its own sales function and has minimal interaction in its daily operational functions with FX Sales or Trading. FXPB tends to physically sit in a different part of the bank due to confidentiality issues. 29. It is useful to compare and contrast the functions of the other various separate, but sometimes overlapping, departments involved in the FX businesses for a bank, all of which reported to the head of the FX division: (a) FX Trading: This is an internal proprietary-focused department, which allows banks to express a view on the FX markets which is translated into market risk in the hope of being profitable on a trade-by-trade basis. This internally-focused group can generate and execute ideas through its own research team or can participate in the trade flow of clients brought to them by the FX Sales Department, and provide liquidity to a client by enabling it to transact in the product, quantity, and direction it needs. It will make a market on a proposed client trade and if they win the trade, will take on the proprietary risk of that position. (b) FX Sales: This is a bank-offered service that manages, sources, and communicates with clients about trading opportunities. FX Sales communicates with FX Trading, which sets a price level when a client wants to execute an instrument. This group is responsible for getting the client to transact with the bank, based on its service orientation and ability to work with its FX Trading group to offer competitive pricing and liquidity on FX instruments. This FX Sales function should not be confused with any sales function which exclusively promotes the FXPB product itself."
"30. Further, and as I explain below, there was no one-size-fits-all FXPB service. On the contrary, in the relevant period from November 2006 to November 2008, the FXPB service offered by banks acting as prime brokers varied from bank to bank and from client to client. This is because the FXPB service offered by a bank to a client would differ from client to client and take into account the client's characteristics and set up. 31. FXPB was first conceived in 1994. A convenient summary of the evolution of the FXPB market is set out in a document that was presented to institutions in 2005 by the Federal Reserve (the Product Overview and Best Practice Recommendations) as follows: "
"51. The role of an FX Prime Broker was understood in the market to be to facilitate the clearing of client-traded products which were approved in the documentation. The FX Prime Broker was not understood to play, and in my experience did not play, any role in assessing or advising on the market risk or possible gains or losses from those transactions. Indeed, customarily the FX Prime Broker would only know about the transaction after it had been executed by the client. … 52. As providers of a clearing service whose primary function is to match and settle trades, it was not customary for FX Prime Brokers to offer risk management services to clients, even though I became aware some FX Prime Brokers offered limited portfolio metrics. By "portfolio metrics"
"This Agreement describes the arrangement pursuant to which Deutsche Bank AG London ("
"1. This authority is expressly limited for each Counterparty in that (a) for any Settlement Date the Net Daily Settlement Amount for such Counterparty may not exceed the Settlement Limit as specified in Annex A hereto and (b) the Counterparty Net Open Position may not exceed at any time the Maximum Counterparty Net Open Position as specified in Annex A hereto. The Settlement Limit and the Maximum Counterparty Net Open Position shall apply to all Counterparty Transactions entered into between DBAG and the Counterparty branch specified in Annex B."
"Prior to entering into any Counterparty Transactions, DBAG shall have executed a Counterparty Agreement with such Counterparty. Agent [i.e. SHI] shall promptly communicate trade details of each Counterparty Transaction by notifying via facsimile or other electronic means an area of DBAG separate from trading and marketing personnel. Each Counterparty Transaction between DBAG and a Counterparty shall be confirmed and settled in accordance with the terms of the applicable master agreement between DBAG and the Counterparty (a "
"4.
"Each Agent Transaction shall be an FX transaction precious metals transaction or option under, and subject to and governed by, the applicable ISDA Master Agreement or other master agreement between Deutsche Bank AG and the Agent, including the Credit Support Annex which is a part thereof (the "
"2. Agent acknowledges and agrees that it shall monitor the Net Daily Settlement Amount and the Counterparty Net Open Position for each Counterparty and that DBAG shall not be responsible for any Counterparty Transaction executed by Agent on behalf of DBAG unless (i) giving effect to such Counterparty Transaction does not cause the Settlement Limit or the Maximum Counterparty Net Open Position to be exceeded (without DBAG's prior written consent or recorded verbal consent (confirmed by fax immediately thereafter)); (ii) such Counterparty Transaction meets the criteria set forth in Annex B and (iii) if such Counterparty Transaction is a Structured Option, DBAG shall have approved the particular Structured Option transaction proposed by Agent, including the Counterparty and principal amount of such Structured Option, and such approval shall have been effective when the Structured Option was executed by Agent (an "
" The FX ISDA … 5. Events of Default and Termination Events (a) Events of Default. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes an event of default (an "
" Allocated Portion " means such amount of the assets standing to the credit of the Pledged Account as is calculated by Party A in its sole discretion and notified by Party A to Party B to constitute the "
"38. Under New York law, on the true construction of the FX PB Agreement in the light of the aforesaid factual background and/or as an implied term, it was a term of the FX PB Agreement that: (1) The Bank would obtain from each Counterparty, retain and/or provide to SHI on demand and/or within a reasonable period of time after each trade a confirmation in writing of each FX Transaction that accurately recorded each FX Transaction. (2) The Bank would ensure that each FX Transaction was booked, valued and recorded accurately in SHI's account (i.e., trading book) with the Bank relating to such FX trades ("the FX Account"). Alternatively, the Bank would exercise reasonable care to ensure that each FX Transaction was booked, valued and recorded accurately in the FX account. (3) The Bank would ensure that each FX Transaction was performed by the Bank and the Counterparty strictly in accordance with the terms of such confirmation. (3A) No equal and offsetting transaction is capable of arising under clause 4 unless the transaction entered into with the Counterparty was within the scope of the relevant Counterparty Master Agreement as defined in clause 3. (4) The Bank would allocate capital in the Pledged Account in respect of each FX Transaction in accordance with the FX ISDA Agreement and would carry out complete and accurate calculations of the capital required in order to allocate capital appropriately and would notify SHI of the capital requirements of its FX trading when calculated, alternatively would take reasonable care to ensure that calculations of the capital required were carried out completely and accurately, and to notify SHI of the capital requirements of its FX trading when calculated. (4A) The Bank would inform SHI of any inability or failure to: (i) book and/or to record and/or value accurately or at all SHI's transactions in the FX Account of SHI or in its reporting systems, and/or (ii) carry out any, or any complete or accurate, calculations of the capital required in order to allocate capital appropriately, and/or failure to allocate capital in the Pledged Account properly or at all. (4B) The Bank would ensure that, in circumstances when it was proposed to enter into a high risk product directly between SHI (through Mr. Said) and the Bank, particularly a leveraged derivative (such as the Exotic Derivatives Transactions, as referred to below), Mr Vik understood the risk level of the product; alternatively the Bank would take reasonable care to ensure that, in such circumstances, Mr Vik understood the risk level of the product. Such a term is to be implied from the fact that it was at all material times the usual custom and practice of an investment bank (such as the Bank) to have a policy or policies providing that, in respect of high risk products, in particular leveraged derivatives (which would include transactions such as the Exotic Derivatives Transactions), that it was proposed to trade directly between the client and the bank, the bank would ensure before entering into the transaction that an appropriate individual in the client organisation other than the usual trading contact understood the risk level of the product. This would typically involve an explanation of the risk level of the product being given to an appropriate individual in the client organisation other than the usual trading contact, unless the bank knew, by reference to previous trading, the client's risk tolerance or other relevant facts, that the said appropriate individual already understood the risk. (4C) The Bank would not allow any trading in a product not approved through the appropriate New Product Approval Processes. Such a term is to be implied from the fact that it was at all material times the usual custom and practice of an investment bank (and SHI understands that it was also a policy and practice of the Bank) not to allow any trading in a product not approved through appropriate New Product Approval Processes. (4D) The Bank would not enter into any transaction with SHI, or accept any transaction under the FX PB Agreement (alternatively, the Bank would not accept under the FX PB Agreement any Structured Option (by refusing to give its approval pursuant to clause 2(iii) of the FX PB Agreement)) which the FX Prime Brokerage division was unable to book, value and record accurately in the FX Account or in its reporting systems and in respect of which it was unable to carry out any, or any complete or accurate, calculations of the capital required to support such trading and to report accurately to SHI such capital requirements (or, alternatively, in circumstances where it was unable to do any one or more of these tasks). Alternatively, the Bank would take reasonable care to ensure that transactions were not entered into in the said circumstances. (5) The Bank was subject to a duty to act in good faith and a duty of fair dealing in the course of its performance such that the Bank was required not to do anything which would have the effect of depriving or injuring the right of SHI to receive any of the intended benefits for which it bargained under the FX PB Agreement; such term being implied as a matter of New York law as the governing law of the FX PB Agreement."
"Except to the extent that liability under any applicable law or regulation cannot be excluded and to the extent of its own wilful misconduct or gross negligence, Deutsche Bank is not liable for loss or damage of any kind whatsoever arising as a result of (1) information published on the Website or (2) any errors or omissions from the Website, including any made in computing or disseminating valuations, and under no circumstances shall Deutsche Bank be liable for any damages whatsoever, whether direct, indirect, punitive special or consequential, that are directly or indirectly attributable to the use of, or the inability to use, the Website, even if advised of the possibility of such damages or if such damages were foreseeable."
"38A. Further or alternatively, the Bank owed a duty of care in tort to SHI in the following respects: (1) A duty to take reasonable care to ensure that each FX Transaction was booked, valued and recorded accurately in the FX Account. (2) A duty to take reasonable care to ensure that calculations of the capital required to support SHI's FX trading were carried out completely and accurately, and to notify SHI of the capital requirements of its FX trading when calculated. (3) A duty to take reasonable care to ensure that information communicated to SHI in relation to its FX trades and its accounts was in all material respects accurate and complete. (4) A duty to take reasonable care to inform SHI of any inability or failure to: (i) book and/or to record and/or value accurately or at all SHI's transactions in the FX Account of SHI or in its reporting systems, and/or (ii) carry out any, or any complete or accurate, calculations of the capital required in order to allocate capital appropriately, and/or failure to allocate capital in the Pledged Account properly or at all. (5) A duty to take reasonable care to ensure that, in circumstances when it was proposed to enter into a high risk product directly between SHI (through Mr. Said) and the Bank, particularly a leveraged derivative (such as the Exotic Derivatives Transactions, as referred as referred to below), Mr Vik understood the risk level of the product. (6) A duty to take reasonable care not to enter into any transaction with SHI, or accept any transaction under the FX PB Agreement, (alternatively, not to accept under the FX PB Agreement any Structured Option (by refusing to give its approval pursuant to clause 2(iii) of the FX PB Agreement)) which the FX Prime Brokerage division was unable to book, value and record accurately in the FX Account or in its reporting systems and in respect of which it was unable to carry out any, or any complete or accurate, calculations of the capital required to support such trading and to report accurately to SHI such capital requirements (or, alternatively, in circumstances where it was unable to do any one or more of these tasks). 38B. The said duty of care arose out of the facts and circumstances pleaded at paragraphs 3 to 14, 16 to 21 and 38(4B) above, in particular SHI relies upon the following matters: (1) The Bank's presentation of itself with key values and priorities in relation to risk management and monitoring of risk and in the provision of customised solutions to clients, as set out at paragraphs 5 and 6 above. (2) The fact (as pleaded at paragraphs 7 and 14 above) that, as the Bank knew, SHI did not have employees or front, middle or back office operations dealing with its investments and so would be reliant upon the Bank for such services, including in particular the services set out in paragraph 7 above. (3) The Bank at all times held itself out to SHI as being able to provide the prime brokerage service required by SHI, as set out at paragraph 19 above, and was aware that SHI did not have access to the data, models and systems referred to at paragraph 19 above; and the discussion and agreement (pleaded at paragraph 20(2) above) that FX trading would be facilitated by the provision of prime brokerage services. (4) The way in which SHI managed its risk, as set out at paragraphs 9, 10, 12, 14 and 17 above, including the parties' reasonable expectations as pleaded at paragraph 10 above, and SHI's requirements as pleaded at paragraph 17 above (which were discussed with representatives of the Bank, as pleaded at paragraph 18 above). (5) That SHI never requested nor agreed to any "trading on credit" with the Bank in relation to FX trading, as set out at paragraphs 11 and 12 above, the standard practice (pleaded at paragraph 12 above) to ensure that the amount of capital due in respect of any trades was always in place on a timely basis, and the discussion and agreement (pleaded at paragraph 20(1) above) that SHI's FX trading would be supported by capital and not by credit. (6) SHI was always treated by the Bank as a Private Wealth Management client, as set out at paragraphs 4 and 14 above. (7) It was discussed and agreed, as pleaded at paragraphs 20(3) and (5) above, that Mr Said's FX trading would be limited as there set out, the amount of capital to be provided by SHI to support SHI's FX trading was discussed and agreed as pleaded at paragraph 20(4) above, and the Bank and SHI discussed the matters relating to Mr Said's FX trading pleaded at paragraphs 20(6) and (7) above. (8) The essential purpose of the FX prime brokerage agreement, as pleaded at paragraph 21 above. (9) The custom and practice pleaded at paragraph 38(4B) above. 38C. In the premises, the said duty of care arose on the basis: (1) that the Bank assumed responsibility to SHI for: a. booking, valuing and recording accurately each FX Transaction in the FX Account; b. carrying out calculations of the capital required to support SHI's FX trading completely and accurately; c. communicating to SHI information in relation to its FX trade and its accounts that was in all material respects accurate and complete; d. informing SHI of any inability or failure to (i) book and/or record and/or value accurately or at all SHI's transactions in the FX Account of SHI or in its reporting systems, and/or (ii) carry out any, or any complete or accurate, calculations of the capital required in order to allocate capital appropriately, and/or failure to allocate capital in the Pledged Account properly or at all; and e. in circumstances when it was proposed to enter into a high risk product directly between SHI (through Mr. Said) and the Bank, particularly a leveraged derivative (such as the Exotic Derivatives Transactions, as referred to below), ensuring that Mr Vik understood the risk level of the product; f. not entering into any transaction with SHI, or accepting any transaction under the FX PB Agreement, (alternatively, not accepting under the FX PB Agreement any Structured Option) which the FX Prime Brokerage division was unable to book, value and record accurately in the FX Account or in its reporting systems and in respect of which it was unable to carry out any, or any complete or accurate, calculations of the capital required to support such trading and to report accurately to SHI such capital requirements (or, alternatively, in circumstances where it was unable to do any one or more of these tasks). And/or (2) that (i) it was reasonably foreseeable that if it did not take reasonable care in the respects set out in paragraph 38A above, SHI may suffer loss, (ii) there was a relationship of proximity between the Bank and SHI, and (iii) it was in all the circumstances fair, just and reasonable that the Bank owed the duties of care set out in those paragraphs. 38D. Further or alternatively, the Bank owed a duty of care in tort to SHI (which arose out of the facts and circumstances pleaded at paragraphs 2 to 14 and 16 to 21 and in particular those pleaded at paragraph 20(3A) above, and paragraphs 44A, 45, 62 and 66A below) to inform Mr Vik on behalf of SHI whenever the collateral requirements of SHI's trading with the Bank were approaching the upper limit of the collateral then available for that trading. The said duty of care arose on the basis: (1) that the Bank assumed responsibility to SHI for informing Mr Vik on behalf of SHI whenever the collateral requirements of SHI's trading with the Bank were approaching the upper limit of the collateral then available for that trading; and/or (2) that (i) it was reasonably foreseeable that if it did not take reasonable care in the respects set out in this paragraph, SHI may suffer loss, (ii) there was a relationship of proximity between the Bank and SHI, and (iii) it was in all the circumstances fair, just and reasonable that the Bank owed the duties of care set out in those paragraphs."
"the New York courts … are extremely wary about imposing extra-contractual duties in contexts where sophisticated parties have set forth their contractual arrangements"
"It is a well established principle that a simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated … This legal duty must spring from circumstances extraneous to, and not constituting elements of, the contract, although it may be connected with and dependent upon the contract."
"[1] A tort may arise from the breach of a legal duty independent of the contract, but merely alleging that the breach of a contract duty arose from a lack of due care will not transform a simple breach of contract into a tort. … [2] A legal duty independent of contractual obligations may be imposed by law as an incident to the parties' relationship. Professionals, common carriers and bailees, for example, may be subject to tort liability for failure to exercise reasonable care, irrespective of their contractual duties. …. In these instances, it is policy, not the parties' contract, that gives rise to a duty of care. [3] In disentangling tort and contract claims, we have also considered the nature of the injury, the manner in which the injury occurred and the resulting harm … In Bellevue , we rejected plaintiff's attempt to ground in tort a claim that defendants supplied defective floor tiles, noting that the injury (delamination of tiles) was not personal injury or property damage; there was no abrupt, cataclysmic occurrence; and the harm was simply replacement cost of the product. Thus, where plaintiff is essentially seeking enforcement of the bargain, the action should proceed under a contract theory."
"A tort obligation is a duty imposed by law to avoid causing injury to others. It is "apart from and independent of promises made and therefore apart from the manifested intention of the parties" to a contract … Thus defendant may be liable in tort when it has breached a duty of reasonable care distinct from its contractual obligations or when it has engaged in tortious conduct separate and apart from its failure to fulfil its contractual obligations."
"Finally, we conclude that the complaint did not allege conduct that would give rise to separate liability in tort. Here, the allegations that a breach of contract occurred as a result of gross negligence does not give rise to a duty independent of the contractual relationship (see Clark-Fitzpatrick … ; c.f. Sommer [the plaintiff's breach of contract claim against the defendant fire alarm company may also sound in tort where the defendant's alleged failure to act with due care affected a significant public interest independent of its contractual obligations])."
"Alex – I would like to propose that in addition to my role of sourcing opportunities in the currency (and other macro) markets for you I also be able to trade a (obviously much smaller) portfolio directly. We had talked about that briefly before I started and as I look at the markets I think it makes a lot of sense. There will be opportunities that are of the kind you like – pretty long term and with genuine home run potential and I will continue to spend a lot time finding and analysing them. But – there is good money in exploiting smaller and somewhat more medium term (a few months, 3-5%) type opportunities. But – to get to those you have to be nimble, quick and a little flexible. Also – they do not not often make it onto your radar screen if you are busy with other things. I think I can do both. In practical terms DB is all but ready with their prime broker set-up and I have pushed them pretty hard on the collateral side where they have now agreed to what I would consider very favourable terms. You do not need to move assets around for we can determine an amount that stays invested as it is, but is earmarked as collateral for "my" account (it cannot be pledged for anything else). Let me suggest that you allocate between 25 and 50mm$ of assets for this – big enough to make a difference to your bottom line over time if I am successful, but small enough not to go overboard – I want to grow into this. I would envisage keeping you closely in the loop on what I do and of course results (daily, weekly, as you wish) and of building a somewhat more diversified portfolio than the core bets we might put on for you at times, which by nature will be very concentrated. … Can we discuss this please?"
"i) The collateral which can support Mr Said's FX transactions is limited to the US$35 million limit. The Bank shall not permit Mr Said (on behalf of SHI) to enter into any FX Transaction if that FX Transaction would cause the Value at Risk for transactions entered into by Mr Said on behalf of SHI multiplied by the Independent Amount Ratio plus the Bank's Exposure in respect of transactions entered into by Mr Said on behalf of SHI to exceed the US$35 million limit. If the Value at Risk multiplied by the Independent Amount Ratio plus the Bank's Exposure is, at any time, greater than the US$35 million limit the Bank will ensure that sufficient open FX transactions are closed out such that the Value at Risk multiplied by the Independent Amount Ratio plus the Bank's Exposure falls below the US$35 million limit. The US$35 million limit is (i) US$35 million , minus (ii) any net realised losses on transactions entered into by Mr Said on behalf of SHI (net realised losses being realised losses on transactions entered into by Mr Said on behalf of SHI less any amount of realised profit Mr Said had made on behalf of SHI that remained available to be used as collateral in support of his transactions (but not such as to increase the limit above US$35 million ). ii) SHI's liability to the Bank in respect of FX transactions entered into through Mr Said is limited to the sum of US$35 million and the Bank's recourse against SHI with respect to FX transactions entered into through Mr Said is limited to US$35 million ."
"As per the legal documents we sent to you, we are suggesting to open a new sub-account for Sebastian Holdings. Klaus would have a Limited Power over this account. We propose that the collateral for the PB FX line would be booked on this new account as well as other potential trades made by Klaus, including the two existing Argentin[e]an bond positions. The reason is to clearly separate Klaus' P&L from other trades. Klaus assumes that he needs approx. USD 75 million, USD 35 million for the FX line and USD 40 million for other trades mainly in fixed income (incl. the existing Argentin[e]an bond positions). Please confirm if you agree to transfer USD 75 million or alternatively the entire balance held in the existing sub-account to the new-sub account."
"I told him that's what we should put in the account"
"Frankly a PB agreement where I can only do spot and simple options is of no use to me and that was discussed at the outset of our discussions."
" Section 1.5. Currency Option Transaction "
"Currency options can take many different forms. There are "plain vanilla" options where one party (the "buyer") pays a premium to the other (the "seller") in order to have the right at expiration or during a specified period to exercise the option into a spot foreign exchange transaction for a specified currency pair. There are also "structured" options, which have different features that allow the option holder to achieve different results, the most common of which are known as "barrier options" (i.e., knock-in and knock-out options) and "binary options" (i.e., one touch and no touch options). These structured options look at the spot exchange rate for a specified currency at expiration or during a specified period in order to establish whether the option is exercised or the option holder is entitled to a specified payment."
"2.16.1. In a TFP, the investor agrees to buy a specified amount of a currency at an agreed rate (the strike price) on a number of dates ("fixing dates") which can be daily, weekly or monthly, depending on the contract. 2.16.2 On each fixing date a settlement amount is determined. The settlement amount for a purchased TFP is calculated as (spot – strike) x notional per fixing date. If this amount is positive, i.e. spot is greater than strike, it is a gain to the TFP investor. Otherwise it is a loss (i.e. a gain to the TFP seller). 2.16.3 The positive and negative amounts accrue with each fixing date and are typically cash settled on the final settlement date. The terms of the trade do not contain any cap on the investor's potential losses). 2.16.4 If the sum of positive settlement amounts reaches or exceeds the pre-specified target profit, the TFP terminates. The sum of positive settlement amounts (which is capped by the target profit in the SHI set of transactions) and the sum of negative settlement amounts are either paid by the seller and buyer respectively on the settlement date or are cash settled by the payment of a net amount by either the seller (if positive amounts exceed negative amounts) or the buyer (if the opposite is the case). 2.16.5 As long as the sum of positive settlement amounts stays below the target profit, the trade continues to exist and settlement amounts continue to be determined and accrued. As is the case when the TFP terminates due to the target profit being met, the accrued positive and negative settlement amounts are paid or cash settled on the settlement date. 2.16.6 The investor in a TFP faces a limited upside (gain is capped at target profit) and a potentially unlimited loss. Typically the TFPs are "zero-cost" structures with a strike price that allows investors to buy the notional amount at a better-than-market outright forward rate. 2.16.7 At inception, the strike price of a TFP transaction is typically in the money (in that the strike is better than the outright forward rate). The investor hopes the TFP will remain in the money and the target profit will be reached within a short period of time. 2.16.8 However, if the FX rate was to move below the strike price (and stayed below) soon after inception, the likelihood of achieving the target profit becomes low. In this scenario, the investor would accumulate losses. 2.16.9 It is possible that the investor will not make a profit even if the target profit is reached. This is because the sum of the negative amounts may exceed the sum of positive amounts on the date when the target profit is reached and the transaction terminates. A TFP is therefore a means by which an investor can express a combination of a directional and low volatility view, as if the market moves in his favour the trade will terminate early and he will receive a profit."
"a. The existence of jumps in the (Monte Carlo based) Disclosed Methodology. Jumps do not form part of the historical simulation used by Dr Drudge to calculate VaR. The jumps have the effect of increasing the VaR results where specific currency pairs are included within the portfolio. b. Differences in the historical time period used to generate predictions of potential future losses. The Disclosed Methodology uses a shorter period of historical data (90 business days) than the Prism Methodology does (250 business days). Mr Millar and Dr Drudge agree that generally where a shorter period of historical data is used, more recent changes in market data have greater impact on the VaR results. c. Differences in the way that potential losses over a five day period are computed between the Disclosed Methodology and the Prism Methodology. The Prism Methodology calculates losses over a one day period and then scales these figures to five days whereas the Disclosed Methodology uses an estimate of the variation in the underlying variables over a five day period and uses these to calculate losses over this period. In the case of SHI's FX portfolio the risk profile is such that the effect of using a five day computational method increased the VaR results. d. Differences in the treatment of potential changes in implied volatility. The Disclosed Methodology does not stress implied volatility, but the Prism Methodology does. Including such a stress within the methodology should generally have the effect of increasing the VaR results under the Prism Methodology."
"2.9.1 Mr Millar and Dr Drudge agree that implied volatility is a factor affecting valuation of TPFs, particularly at deal inception. In addition, when considering the impact of stressing the implied volatility parameter at an individual trade level, Mr Millar and Dr Drudge agree that there can be a significant impact on the overall VaR calculation for the individual trade, as explained in further detail in paragraph 2.9.4 below. However Mr Millar and Dr Drudge also agree that the impact of stressing the implied volatility parameter at portfolio level will not always be material, depending on the particular constituent trades contained in the portfolio and market conditions, as set out below. 2.9.2 Mr Millar and Dr Drudge agree that their VaR results indicate that the approach set out in the Disclosed Methodology which does not include the simulation of changes in implied volatility contains other features, as set out above in paragraph 2.8.2, which result in higher VaR calculations than Dr Drudge produces using the Prism Methodology when applied to SHI's FX portfolio. The Prism Methodology does include the simulation of changes in implied volatility. 2.9.3 On this basis Mr Millar and Dr Drudge agree that when applied to SHI's FX portfolio (for example as produced for each of the Alternative Scenarios by Mr Millar), the Disclosed Methodology does not produce unreasonably low VaR results as a result of not simulating changes in implied volatility. Mr Millar and Dr Drudge's area of disagreement regarding commercially reasonable VaR estimates is detailed in section 3. 2.9.4 When considering the theoretical impact of stressing the implied volatility parameter at portfolio level, Mr Millar and Dr Drudge agree that the following factors are likely to be relevant: a. The relative sensitivities of the individual trades to other risk factors being stressed by the model, in this case FX spot rates, driven by the current economics of the trade in the portfolio. For example a TPF that is out of the money would be much less sensitive to movements in implied volatility in comparison to a TPF that is not out of the money, for example a TPF that had been recently traded. b. The relative variability of each risk factor. For example if as a consequence of a particularly quiet historical observation period implied volatility was not expected to move very much then it would not be expected that VaR would be highly affected, and conversely if implied volatility had experienced large moves over the historical observation period, this would have a greater impact on the VaR. c. The degree of diversification across all of the trades in the portfolio and how this generally decreases the marginal impact that risk factors have at trade-level. For example whereas the valuation and risk of a certain trade might be strongly affected by a certain risk factor (i.e, an FX spot rate or implied volatility), if the proportion of trades in the portfolio affected by that risk factor is small, then at portfolio level the risk factor may not be significant at all. d. The inter-relationship between these aspects of the VaR methodology. For example in the case of EDTs the impact of including jumps in an FX spot rate may mean that, as the sensitivity to implied volatility decreases the more the trade is out of the money, and as VaR scenarios are likely to include jumps, the number of VaR scenarios where implied volatility would have a significant impact may be minimal for currency pairs where the Disclosed Methodology prescribes jumps. 2.9.5 As a result of this, the potential impact of shifting the implied volatility parameter on VaR results over time at the level of any particular portfolio will depend on the trades which constitute that portfolio over time. See the comments made by Dr Drudge below in relation to his conclusions regarding commercial reasonableness following examination of the VaR results."
"Q. The terminological or definitional difference, can I suggest, between you is that you are saying it may be the ninety-fifth worst output of this model or this disclosed methodology, but because it reflects within the assumptions used in the disclosed methodology more extreme assumptions for size and frequency of particular emerging market currency spot rates changing, it is not the ninety-fifth worst outcome during a normal market period? A. Yes, I think that … I think that is about right. Ultimately you can put anything into the 95th percentile if you choose to, right."
"343. Setting aside the valuation issues experienced by Mr Said throughout the duration of the FX PB relationship, described in more detail below, Web Reporting was designed to, and did, report the relevant trade details for swaps, forwards, cash trades, and vanilla and single barrier options (known in the experts' lists in this litigation as Knockout Currency Options). As to more exotic options, however, the position was considerably more complicated. (1) There were certain trade types that could be booked in RMS but did not feed through to GEM, and thus did not appear in GEM reports or Web Reporting at all. As would become clear in October 2008, these certainly included the DBA Security trade types used to book EDTs by [DBAG's] trading desk, but also, for example, correlation swaps, which do not appear in any of the 2012 Reports. (2) Other exotic trade types did feed through to GEM after a fashion. However: (a) GEM and Web Reporting could not properly report the trade details for those trades, not least in that their reports did not include fields for all of the relevant information. (b) Further, at least some such trades did not (when booked and open) appear in the relevant reports with any regularity. For example, as described in more detail in section D14, trades booked as "
"The day [I] go to Steve to ask if we can take in a trade … that will never happen"
"This trade type is one of the most structured types of business we are currently supporting on the franchise side, and there is no way PB can accurately book or monitor this trade type. Apparently the business is signing off on these when we receive CS confirmation, although this does not alter the fact that the trade is not accurately captured in RMS."
"Note that Sebastian Holdings is on VaR and all their positions are valued and risk managed for margin purposes out of [ARCS] [V]aR."
"DB as PB accepted all the trades as I did them and processed the knockouts and payments as they occurred. I did not receive mark to market on these structures form [sic] them however and I did not notice an appreciable impact of the options on the required margin calculations. The options also either did not show up at all in the online P+L or were there, but with non-sensical P+L numbers. There were some discussions with DB about their ability to handle these – I wanted to make sure they were in a position to support them so I initiated the conversation with Rafael Quezada. DB's position I recall (from memory of phone calls) as follows: - we can support these structures - we want to support these structures - we should be able to mark them to market - But only our trading desk can and they don't like doing it for deals not done with them. - They asked me quite directly to do some of these deals with the DB desk (which has not distinguished itself in terms of pricing whenever I gave them a chance) to "create some goodwill so we can work with the trading desk on the other structures. DB actually improved their pricing and I did several transactions with them. That seemed to settle any residual issues DB might have had with booking or handling these options. In terms of margin impact – it is not clear to me exactly how much INITIAL margin one of these structures should attract. But it seems form [sic] following the margin daily that DB may not have attributed any. In terms of variation margin – many of the options knocked out quickly and benignly without ever developing much mark to marked [sic] value – but some definitely did (I recall the very first euro Norwegian Krona option went right to the top of its ban and stayed there for a while before – as had been my view, retracing and knocking out with good profit. Again – from memory, I do not recall an impact on the margin calculation – and looking at it now, there should have been given the option must have a decent size MTM loss for a while which should have meaningfully decreased the margin capacity. It is true that there was built-up profit in the account which would have meaningfully INCREASED the margin capacity (see above). DB pointed this out on a call to me. However, much as he did in 2007, Alex did in the summer (I believe in July) withdraw 66mm$ from the account (a move I suggested to him given the cash was lying idle) which would have been substantially all the built up profit. Therefore in terms of margin capacity, we should have been back to the 35mm$ we started with (or in the general neighbourhood). The portfolio of these options was actually very similar through-out much of 2008 – primarily eur/chf, $cad and eur nok with some currencies like aud/nzd eur/stg, eur$, $ yen stg/chf and $/brl added on occasion. Throughout 2008 there were no margin calls form [sic] DB nor was MTM from the options represented in the P+L." vi) It is relatively clear from this summary that although Mr Said refers to a settlement of any residual issues DB might have had with "booking or handling these options" following his discussion with Mr Quezada, there is a gap in his logic as to how this could be the case since only the Trade Desk was able to mark the transaction to market and it did not like doing it for indirect trades given up to DBAG as Prime Broker. Mr Said stated that although it was not clear exactly how much initial margin these options should attract, he appreciated, from following the margin daily, that DBAG might not have attributed any at all. He did not also recall any impact on the margin calculation at all when there should have been variation margin by reference to changing MTM. He said that there were no margin calls "nor was MTM from the options represented in the P&L" (by which he meant the reports of MTM). vii) Mr Said then referred to DBAG's request in August of 2008 for a meeting to discuss margin in New York. He appreciated that the original terms were "simply too generous"
"The portfolio of options (still) did alright through September and early October (all but three accruing positive every day) with the exception of the 4 $ brl structures (really part of one trade but spread over time). $ brl had started to move up steadily and in the first week of October the move suddenly accelerated. I was aware that we were looking at negative accruals and what had to be a decent MTM loss (I believe I wrote to Alex about these options and the strategy given the illiquidity of the market). DB did not, to my knowledge react to any of this, nor was any negative MTM incorporated in the margin calculation. What happened next, I believe in early October (week of Oct 6th I think) was that Morgan Stanley, which had dealt with three of the four structures in question, apparently approached DB about separately margining these. Suddenly I got several calls form [sic] DB now asking about these options and did I have a MTM on them or could I get it from the counterparts. I think I told them I was pretty busy managing our risk in difficult markets and I wanted them to get the mtms – as they had initially said they could and would. This went on throughout the week of Oct 6 while I was discussing with Alex how to proceed on these options which were clearly showing a meaningful loss – but it was also not clear to me that cutting them out here was necessarily the right approach. Brl weakened steadily throughout the week, but we did not receive any margin calls from DB."
"8. The structure of the collateral was also discussed. I explained to the Bank (and I understand that Mr Vik did as well) and the Bank understood that my trading had to be separate and isolated from other Sebastian Holdings' assets and that Sebastian Holdings was only willing to expose a specific sum for my trading. The Bank recommended and agreed that this would be accomplished by Sebastian Holdings, in connection with the opening of the New York FX PB Account, pledging as collateral the equivalent sum of$35,000,000 in a newly opened separate account of Sebastian Holdings with the Bank in Geneva, Switzerland and that the Bank in Switzerland would issue a guarantee against such account, in such amount to the New York FX PB Account to support the FX trading in New York. This would also create a system of checks and balances for Sebastian Holdings as, for instance, Thomas Brugelmann could monitor the risk in the New York FX PB Account from the balance in the pledged account. 9. All of the trades I did in the New York FX PB Account were based on the$35,000,000 pledged by Sebastian Holdings in the Geneva account in Switzerland and the guarantee issued by the Bank in Switzerland to the New York FX PB Account. I understood at all times, as did the Bank, that my trading was limited to the specific amount of collateral and no more. Indeed, on two separate occasions, Sebastian Holdings transferred funds out of my account as such funds were not used to support my trading. There was never any discussion or agreement that any of Sebastian Holdings other accounts or assets would be available as collateral for my FX trading. In fact, in October 2008, Rafael Quezada of the Bank requested that I ask Sebastian Holdings to increase the pledge. From earlier communication with Mr Vik, I did not think that Sebastian Holdings would consider increasing the pledge and I never made such request of Mr Vik."
"15. Throughout my FX trading, I had continuing discussions with the Bank about its obligation to provide accurate reporting, either as part of the Bank's website to which I alone, not Mr. Vik, had access, or the daily reports that Bank personnel, including Matt Walsh, would periodically send only to me by e-mail. Several things should be noted: first, I often checked the "available" collateral on the Bank's website and found that I never got close to the limits. At no time before October 2008 did the Bank inform me that the Bank had failed to include any trades in the collateral calculations. At no time did I ever agree that the Bank had no duty to provide accurate reports. To the contrary, I was constantly assured, particularly by Quezada, that the Bank had a "good system" and that the Bank was capable of providing accurate reporting. Quezada and others at the Bank understood the Bank's obligations to provide accurate reporting and that such reporting was critical to monitor risk. 16. Indeed, I always made it clear to Quezada that the Bank should only "take in" the structured accrued pivot trades, which I started doing in 2008, if they could handle them and accurately value and put them into collateral calculations. Quezada assured me that the Bank was able and happy to accept them and every trade was pre-approved and accepted by the Bank. Indeed, Quezada even asked me to do my best to do a few of these trades with the Bank rather than the other counterparties, which I agreed to do for him on a few occasions. The Bank was clearly eager for me to engage in the pivot trades and the Bank was able to value the pivot trades. 17. I never agreed to conduct pivot trades without their value being reported on the Bank's website. As the Bank well knew I did not have any authority to do so and reporting exposures was a prime obligation of the Bank as it well knew. 18. The Bank was required to include all trades including the pivot trades, in their reporting and all trades, including the pivot trades, were supported only by the$35,000,000 in the pledged account of Sebastian Holdings in Geneva and the corresponding guarantee from the Bank in Geneva to the New York FX PB Account. 19. As this was my understanding as well as that of the Bank, I continued such trades in 2008. I did not notice any appreciable impact on the pledged collateral amount for these trades. The structures either did not show up on the website or sometimes were there but with nonsensical numbers which I pointed out to the Bank on several occasions in my efforts to make sure the reporting was correct. In all events, I engaged in such trades relying on the Bank's obligations to Sebastian Holdings as its prime broker and pursuant to the New York FX PB Agreement. 20. For example, I sent an e-mail to Matt Walsh alerting him that the numbers in the live mtm module relating to two earlier pivot trades did not seem accurate to me and I thought that these inaccurate numbers should be excluded from the real-time reporting system until they were corrected so as not to render all real-time information erroneous. This e-mail related only to those two trades and only about the real-time reporting. It was not an instruction to exclude pivot trades from being valued in the Bank's system. Communications like this were to make sure that, among other things, trades were properly matched and documented and correct information was being used. I again continued to rely on the Bank's assurances that they could value the trades and correctly report their calculations. 21. Never once during the many months of my pivot trades did the Bank ever suggest to me, nor to my knowledge, Mr. Vik, that the trades were in excess of the collateral limitation ($35,000,000 ) or that there was "inadequate security." 22. While in late August 2008 the Bank, in New York, did ask me, not Mr. Vik, to have discussions take place concerning what eventually resulted in their unilateral change of collateral calculation methodology, never once was I advised by Michael Spokoyny (or anyone else at the Bank) that he was aware of any deficiencies in collateral or what the Bank has come to now allege were "hundreds of millions of dollars of losses." 23. To the contrary, when the Bank and I (not Mr Vik) did meet, pivot trades were raised and I was assured by Spokoyny, as I had been in the past that the Bank was accurately valuing these trades and including them in their collateral calculations. All we discussed and eventually received was the Spokoyny e-mail of October 6, 2008 unilaterally requesting that the methodology for calculating collateral requirements was to be modified with the result that the required collateral in the account of October 6, 2008 was to be increased by$5,000,000 ($35,000,000 ) to$40,000,000 . Because my collateral was limited to$35,000,000 , and Sebastian Holdings was not interested in increasing the pledge, this required me to reduce my trading positions. No mention was made of pivot trades or the fact that by that time the Bank may have known about losses amounting to hundreds of millions of dollars, all of which was unknown and unavailable to me and of course to Mr. Vik with whom, prior to mid-October 2008 I did not discuss my pivot trades. 24. I believe that it is only when the Bank thought it was going to receive a request from a counterparty (I believe Morgan Stanley) in October 2008 to post collateral for individual trades because of "mtm" (that is, mark to market calculations) done by such counterparty, that the Bank finally realized that it had to disclose to Sebastian Holdings what the Bank alone knew all along: that the losses had been and were becoming staggering and that the Bank had failed to comply with its calculation and reporting requirements to Sebastian Holdings under the New York FX PB Agreement and the prime brokerage relationship. 25. Even then, the Bank, recognizing and well aware of the$35,000,000 collateral limitation requested it be increased by only$5,000,000 to$40,000,000 . The Bank, knowing I (and of course Mr. Vik) had no access to mark to market calculations, was the only party which could accurately calculate and report collateral requirements and it failed to do so. 26. Indeed, when I received the first purported "margin call" from the Bank on October 13, 2008 it was erroneous and the Bank knew that it was erroneous; understated by hundreds of millions of dollars. Had the Bank reported accurately, I would never have entered into the trades and I would have liquidated any trades on an earlier and more timely basis and Sebastian Holdings would have suffered substantially lesser, if any, losses and the wrongful margin calls would not have been satisfied. 27. My trading was supported only by the$35,000,000 guarantee issued by the Bank in Switzerland to the New York FX PB Account and neither the Bank nor any other party provided any other financing to support my trading activities. I did not have any authority to borrow from the Bank nor have I ever done any trades with the Bank on "margin"."
"[I] think they have finally figured out a way to actually margin all my Pivot trades and are trying to break the news to me that the freebies are over."
"We know he does structured options [both] direct and indirect that require [additional] work in order to book and trade."
"markets are stuck in ranges and are likely to stay that way with little new truly market moving new information likely to fundamentally change the picture. Implied volatility is overvalued. Consequently I am short vol through options and range trades. This has worked well so far. This week I took in another 4.5mm$ for an expired range trade and a good chunk more is coming early next week. I am replacing trades as they expire – it is still good value. Obviously not without risk at all if we get precipitous moves that do not mean-revert but good risk reward in this directionless market."
"Klaus: Well…you know… uh the problem is I mean I have to discuss this, I mean, I have discussed it in principle with, with Alex, but I mean what clearly has happened here is that um, you know, I mean we sort of got a free ride on those for the past 6 months… from a mark to market point of… from a collateral point of view, right? Rafael: Yeah. Klaus: Uh, I realize that. Now it coincides unfortunately, this would have come up anyway, it coincides unfortunately with some of them having really moved out of whack, but these things have moved out of whack before and have come good. Now the Brazil is a very particular problem and, you know, I am working on restructuring some of them and so on and so forth, um but we clearly have to… Alex and I have to discuss what we, how we approach this going forward because it will just simply require a lot more capital. Rafael: Yeah. Klaus: Is that fair? Rafael: Yeah, definitely and I think that, you know, up until, up until now, right, these things, kind of, you know, they sit there and, you know, you worked with us in terms of matching these… pairing these things off with the banks, right, but they, you now, they kind of sit in the place that, you know, we just need to be collectively diligent in terms of ear marking separate collateral on these, right, cause my engine does not capture these things, right? Klaus: Right. … Rafael: No worries, yeah, so, you know, I mean I thinks it's a… you know those things don't fit nicely within, you know, the VAR calculator, either, right, so… Klaus: Yeah, yeah, yeah, yeah."
"The issue here is the range structures of which I have done many over the past 6 months. Many have knocked out with big profit, several are outstanding and will produce good profit a few are iffy but manageable and then there are the ones in brl that we discussed. However - they all have one thing in common - they are great structures if you can trade them and treat them as effectively an accrual product (longer term hold) which is what I have done. The disadvantage - as we have discussed, is that on a mark to market basis they will almost invariable show losses in most circumstances until they knock out. What I do in these trades is buy/sell a currency at the bottom/top of usually very wide ranges. Profit accumulates, losses get deducted (if it does move outside the range) until pre-determined knock out levels on the total profit figure is reached - and the trade goes away. For example: I am 99.99 pct certain a big euro dollar structure I had will knock out today. I did it with spot at 1.44. Vol was so high that the range I got was 1.33 to 1.55. I did this in 5mm euros per day and the profit cap was 5mm USD. Despite the massive move in eur dollar from 1.44 (where it was when I did) to a low of 1.3450 the trade always accrued. It took longer than I had hoped because of the spot move but today, unless something crazy happens in the next 1 hour it will reach the target. It knocks out. We book 5mm usd. So that is the good news. The bad news is that what I look at as a range is of course a combination of short options positions (puts and calls, at the moneys and wings) and it is pretty big. If from when I do a trade vol goes up at all (which it has of course in a big way) and spot moves away form the middle (which it invariably will) these trades will show substantial mtm losses very quickly. Even trades that are not that far from knock out and have not moved too much will show that - I have a nok/sek which is about 65% to knock out and accruing quietly but of course vol has gone up a lot and spot is off the 1.18 center where I did it - and it is showing a meaningful mtm loss (like 8mm $ or so) I am unconcerned about that - we trade these as accrual products - I manage the risk of course (restructure, hedge spot, overlay new trades for an average etc) but ultimately I look at these as hold to maturity trades. Not only is that my preferred way of trading the structures - it is also the only way. The wide ranges and (in many cases) quick profits come with a cost - you have to take the swings and let moves mean-revert (and of course try to act quickly when you really think it is not coming back - but only then - otherwise you will get chopped up and lose all value and profit. So far so good and we have discussed all this. Here is the issue: For the past year Deutsche Bank gave us a free ride on these things because they could not value them properly in their system. That was great while it lasted. They have woken up. We can drag this out for a bit but we have to make two decisions: 1. Unless we want to unwind all the trades (which would be disastrous - both in terms of actual losses as well as foregone profits) we will have to post substantial collateral – I'll run you through the numbers as I have them. Right now only one of the counterparty banks has raised the issue and I am not sure if DB will extend it to all old trades and all new trades but the bank (Morgan Stanley) has of the brazil position we have and that of course on a MTM basis is causing the biggest issue (spot by the way is down to 2.15) but vol is still sky high and that is actually for the mtm just as big an issue. I know you don't like that - I can only say the money we have made on these on almost no capital was just a freebie. I don't know what you can negotiate with the private bank - just pledging, as before, rather than sending cash would of course be the best. 2. Going forward - these are great structures - they way we can trade and hold they are the best way to sell volatility at high levels. But - do you have the stomach for the swings in mtm - which will result in substantial collateral requirements. If you do not than I would have stop doing them - a shame given how useful and profitable they are but it does require capital. One way or the other I still want to put a bunch of new trades on to restructure some of the Brazil - that makes sense and should be net collateral neutral (we are shifting the accumulated mtm loss into other, more liquid currencies. So that is the issue- not something we can ignore given the trades is on the books. I have so far largely ignored mtm in my trading (not completely - and I am always aware of it) which has been a great advantage for us because we can often buy when others are selling in panic or hold when others have to get out. We were able to do that essentially for free - almost no capital requirement. That will not be the case going forward ... I believe I can continue to make very nice returns - and you get 90% of them. But - it will now require a more "normal" amount of capital. What I am hoping is that you can allocate a meaningful portion of your nok t bills or whatever it may be (which does not produce that much of a return) on a pledge basis to this trading - I think the return has been and on average over the next few years should be worth it - but that is your call. So we need to discuss! Klaus"
"4.1 On each Business Day the Prime Broker shall in good faith calculate the Margin Requirement in accordance with its procedures and notify the Counterparty thereof. 4.2 In the event that the Margin Requirement on any Business Day is higher than the Margin Requirement on the immediately preceding Business Day, the Counterparty shall on demand: 4.2.1 deposit Securities of a type acceptable to the Prime Broker into the Securities Account; and/or 4.2.2 transfer cash into the Cash Account; such that the aggregate of the Market Value of any such Securities held in the Securities Account and the face value of any cash held in the Cash Account shall, immediately following such transfer on that Business Day (converted where necessary into United States dollars at the Prime Broker's spot rate for such conversion) equals the Margin Requirement notified by the Prime Broker for the relevant Business Day."
"Notwithstanding any other provision of this Agreement or any other Underlying Agreement, transfer of cash or Securities in compliance with Clause 4.2 shall constitute good discharge of the Underlying Margin Obligations of the Counterparty for the applicable Business Day under each of the Underlying Agreements."
"10.1 Transactions: This clause applies, except to the extent inconsistent with Applicable Regulations, to transactions in futures and options. In this clause, "
"12.1 Margin Call : You agree to pay us on demand such sums by way of margin as are required from time to time under the Rules of an Exchange (if applicable) or as we may in our discretion reasonably require for the purpose of protecting ourselves against loss or risk of loss on present, future or contemplated Transactions under this Agreement. You will be required to supplement that payment at anytime when your account with us shows a debit balance or an increase in your Margin Requirement. 12.2 Purpose of Margin : All margin shall be held for the following purposes: for application in respect of Transactions entered into pursuant to this Agreement; to pay to the relevant Exchange or broker any margin due from us to it on such terms as we think fit and in respect of all positions held by us for all our clients (including connected persons); to apply in or towards satisfaction of, or in reimbursement to us of, all costs, damages, losses, liabilities and expenses incurred under or in respect of all and any transactions and all liabilities and expenses (including dealing turns, charges and taxes) incurred as result of the performance by us of our duties or the exercise by us of our rights, powers and/or privileges hereunder (irrespective of the currency in which the same is denominated). 12.3 Transfer : You shall Transfer to us, on demand or within such time as we shall specify, such Acceptable Margin as we may require in accordance with our Margin Requirement. 12.4 Title : You agree that all right, title and interest in and to any Acceptable Margin Transferred hereunder shall pass to us outright, we being obliged to Transfer Equivalent Margin in the following circumstances: (a) if we determine, in our sole discretion, that our Margin Requirement has been reduced; (b) provided that none of your obligations to us are then outstanding, upon an assignment or transfer of a party's rights under the Agreement; or (c) provided that none of your obligations to us are then outstanding, upon termination of the Agreement."
"In connection with the opening of the accounts in London in which Said had no role, and again unrelated in any way to the New York FX PB Account or its activities or transactions, and solely for other investment purposes of Sebastian Holdings, the Bank and Sebastian Holdings entered into various agreements, all drafted by the Bank, including another, unrelated prime brokerage agreement dealing solely and exclusively with the London accounts. …"
"For the avoidance of doubt, it is intended that this Agreement govern all Transactions other than FX Transactions and Currency Option Transactions. Unless otherwise agreed between the parties, FX Transactions and Currency Option Transactions (as defined in the 1998 FX and Currency Option Definitions, as published by ISDA, the Emerging Markets Traders Association and The Foreign Exchange Committee (the "
"For the avoidance of doubt, it is intended that this agreement shall only govern Foreign Exchange Transactions and Currency Option Transactions (as defined in the 1998 ISDA Definitions as published by the International Swaps and Derivatives Association, Inc. ("
"Positions are being moved over (your positions that is – mine have to stay separate because I am located in the US and this is a London law agreement – don't ask me, but apparently that's the way it is)."
"I'm writing to you with an update on your margin situation in the London PB account. In summary, following the recent rise in the USD, your available margin is being eroded quickly. Today's continued decline in the NOK could prompt a margin call soon. Please consult the table below with a summary of your margin situation as per cob yesterday: Net Cash: NOK 1.607 bln Securities: NOK 3.851 bln (incl. NOK 1 bln DnB CD and NOK 2.05 bln T-Bill) Margin Equity: NOK 5.458 bln minus FX losses: (NOK 0.877 bln) plus futures liquidation: NOK 0.100 bln adj. Margin Equity: NOK 4.681 bln Margin Requirement L/S equities: (NOK 0.739 bln) Bonds: (NOK 0.102 bln) FX: (NOK 2.686 bln) Special: (NOK 1.268 bln) Margin Requirement (NOK 4.795 bln) An inflow of an additional NOK 115 mio is pending from the sale of equities instructed by Harald "
"On the subject of FX risk, the client took note of the disparity in results between stress-tested risk calculation and the results produced by the VaR methodology, but demanded that we have that discussion with Klaus Said rather than with him. He has allocated a US$35 mio risk budget to Klaus and he wants to await the outcome of our discussion with Klaus before deciding whether to explicitly support an increase in his line."
"At the request of Alex Vik I had prior to my meeting with him asked for "a screenshot of the various open accounts for Seba[s]tian as well as a summary of the current open positions" from FXPB … I do not have access to the FXPB website myself, and the client had asked me for this type of information on previous occasions, when we met in person. The report I received and left with Alex Vik did not, however contain any information regarding the structured option positions. Very likely these trades were properly booked and were reflected on the TRM FXPB website accessible to his trader, Klaus Said, but for some reason did not appear on the report I received. The resulting margin call starting October 13th was triggered by the structured options."
"Use of this fxmarkets Trading website (the "
"… the maximum potential change in the value of a portfolio of financial instruments over a specified time period and within a specified confidence level, as determined by [DBAG] in accordance with the methodology determined in its discretion which it customarily uses with its counterparties. The Value at Risk shall equal the aggregate of such potential changes for each currency pair in which there are outstanding FX Transactions or Currency Options Transactions under this Agreement."
"Alex, Please be advised that the Sebastian account is on call for NOK 2,007,534,737. Please advise cover accordingly. Kind regards, Erica."
"We also note that we have yet to receive the "notice" of22nd October 2008 referred to in your letter."
"As per discussion with Alex, I am forwarding current status of the unwinds. - Yen pivot with delta at$33.7 million (GS) - the 2 Euro/Nok pivots with delta closed out at Euro 125.5 million with DB (GS + CSFB combined cost would have been Euro 132.37 million - Residual Euro/Nok cash closed out at 9.169 - We also have a total amount of payments of$312.38 million to be made on the back of previous unwinds made by Klaus and the above trades. Some small residual positions are left to be closed out, but not significant. Currently we have a deficit of$117,668,882 which needs to be settled with us today. Let's discuss in about 30 minutes."
"7 SET OFF AND CLOSE-OUT 7.1 On or at any time after the occurrence of an Event of Default (excluding the events described in paragraphs (iv) and (v) of the definition of Act of Insolvency on the part of either party) in relation to either party (the "
"… a decision maker's discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality."
"1. On15 September 2008 Lehman Brothers in New York went into bankruptcy and world financial markets, which had been in a fragile state for more than a year, went into free fall. In the liquidity crisis which quickly ensued, the so-called "credit crunch", values became entirely distorted. The best of shares, because they could at least be freely traded, suffered egregious mark-downs in price as their holders strived for liquidity. The worst of shares suffered even more horrendously. Banks, whose transactions had become hugely leveraged and which were in the very crucible of the credit crunch, saw their share price cut to ribbons as they struggled for survival. 2. This was the market in which a basket of exotic stocks or shares held by a fund, the Global Opportunities Fund (the "
"Sebastian Holdings hereby agrees to distribute 3 billion Norwegian Kroner to CM Beatrice Inc in settlement of all Sebastian Holdings debts and obligations to CM Beatrice Inc and any claims of CM Beatrice Inc has on Sebastian Holdings. This will be completed within 120 days."
"Did commodities. Was going to do equities but too complicated."
"In the context of the 1992 ISDA Master Agreement, it is submitted that the provisions setting out the circumstances in which termination is permitted, and the consequences of such a termination are intended to be comprehensive, especially as regards matters falling within the scope of the termination provisions. The contrary view would mean that … the methodology prescribed for calculating the termination payment due on a contractual close-out would be inapplicable and the parties' choice of the "
"Gambling with cards or dice or stocks is all one thing. It is getting money without giving an equivalent for it."