In the fortnight leading up to the UK's referendum on membership of the European Union, the treasury unit at one big UK bank was trying to ensure it would not run out of US dollar funding. While opinion polls indicated a win for the Remain campaign, a win for Leave could see demand for dollars spike – from derivatives margin calls, for example – at the same time as a sterling crash.
The bank was keen to give itself some flexibility by trading foreign exchange forwards and cross-currency swaps, but the cost for larger trades was soaring.
Enter Goldman Sachs' short-term macro group, created 18 months ago to trade foreign exchange forwards and short-term rates products. The group executed a series of forex forwards and cross-currency swaps with the UK bank in the two weeks leading up to the Brexit vote, when the risk premium in the market was at its greatest.
The UK bank went back to Goldman in August for a series of rates trades, some as large as £1 million DV01 on two-year rates versus one-month Libor, on the day before a Bank of England rate-setting meeting.
Goldman was able to provide what the UK bank saw as a fair price because it did not hedge the trades like-for-like, instead using a combination of short-term rates, cross-currency basis and forex trades to cover the market risk, leaving the US house with basis risk.
"The cross-market nature of our product set allows us to offer better liquidity to clients than if we were simply showing a price and trying to find the exact offset in the market. If we see greater depth in the forwards market than the rates market, we may choose to hedge a client forward trade with a rates trade. Warehousing this basis risk between the two markets allows us to offer the best liquidity to clients and minimise our execution footprint," says Beth Hammack, head of global repo and the global short-term macro business at Goldman Sachs in New York.
The cross-market nature of our product set allows us to offer better liquidity to clients than if we were simply showing a price and trying to find the exact offset in the market
Beth Hammack, Goldman Sachs
A senior member of the UK bank's treasury team credits Goldman's proactive approach, willingness to provide capital – particularly for the cross-currency swaps – and the set-up of its short-term macro group for the success of the trades.
"When it came to crunch time, when things needed to be executed, they stood up," he says.
Goldman Sachs has long had a reputation as the dealer you go to when in a corner, and the events of 2016 look set to reinforce that. The bank's rates business broke its single-day volume record on June 24, after UK voters opted to leave the European Union, and beat that record by 30% on the day of the US presidential election results.
That stood out for clients. A New York-based senior derivatives trader at one of the world's biggest asset managers says: "Any of the 12 dealers we have can put aggressive prices on risk in low-volatility periods. The differentiator is when things are moving around as in the post-Brexit or US election periods. We were able to move a lot of risk we needed to with them, more so than with others."
A US hedge fund manager also praises the bank for being willing to unwind trades during those periods of volatility: "We were taking profit on some trades. Some guys stepped back. These guys, instead of stepping back, stepped forward," he says.
But some of these clients have detected a change in Goldman over the past 18 months. The standard knock against the bank in the past has been that it treats even its best customers as counterparties – providing second-to-none ideas, pricing and liquidity, but only when axed to do so. This year, some of those clients say they are being treated more like customers, with Goldman placing more emphasis on consistency.
The UK bank's treasury source, for example, says Goldman has made more of an effort to see the world through his eyes: "I don't do this with a lot of people, but I reached out to them recently to explicitly say, ‘So you know, I couldn't be happier with the way the relationship is going. It feels you're aligned with the way we look at the world, and you're willing to do things that a lot of other banks are not'."
The New York-based senior derivatives trader says Goldman was always a major player, but has improved over the past two years, particularly in swaps and swaptions, where the dealer was top and top two for his employer, respectively, in 2016.
We had to come up with a bilateral portfolio between us, LCH and the non-core bank, which involved several different currencies, multiple cross-currency swaps and swaptions in another currency
Paula Madoff, Goldman Sachs
"They have a deep understanding of the way we operate. There are liquidity constraints in the market, but they're very willing to work with us – if we disagree on where the market is, they're willing to meet in the middle. They're taking a long-term view of specific trades and the relationship as well," says the derivatives trader.
For Goldman, this is the culmination of a number of parallel initiatives over recent years. One effort was to try and improve its standing among real-money clients such as asset managers, insurers and pension funds – working with them not just on execution, but helping them understand and respond to wider market issues such as the inversion of the spread between US Treasuries and interest rate swaps, which was a big talking-point during the second half of 2015.
Together with the creation of the short-term macro group, set up to combine instruments that are reliably correlated, it meant clients have become increasingly comfortable calling on the bank for a wider range of trades. Goldman's traders claim to be seeing an increasing number of non-competitive block-size trades. It also traded a $6 billion programme of constant maturity swap floor spreads traded exclusively with one US life insurer over a single week prior to an important monetary policy meeting.
"[The creation of the short-term macro group] drove both our ability to offer intermediation but also gave us a chance to offer additional content, focused on the earlier part of the curve, which is affected by economics but also political outcomes," says Kostas Pantazopoulos, global head of interest rate products at Goldman Sachs in London.
Another beneficiary of this new approach has been the US government sponsored enterprises (GSEs). A source at one of these says Goldman performs well in big swap trades, but also stands out in other areas – for example, helping benchmark the GSE's valuations, providing advice around the swap spread dislocation, and giving regular insight into regulatory or clearing-related matters.
"We rely on Goldman for the thought leadership and mindshare stuff, whether part of the macro environment in the interest rate market, or regulatory requirements that are affecting the interest rate derivatives market, and how they impact us and other participants," says the GSE source.
[The creation of the short-term macro group] drove both our ability to offer intermediation but also gave us a chance to offer additional content, focused on the earlier part of the curve, which is affected by economics but also political outcomes
Kostas Pantazopoulos, Goldman Sachs
Another change can be seen in the treatment of non-core units at other banks, which were previously considered competitors, but are now seen as clients that should be served like any other large, sophisticated firm. This change saw Goldman Sachs bidding to conduct significant compression and backloading exercises with a number of non-core bank clients.
In one exercise, Goldman and a European bank wanted to backload bilateral swaps in a single currency to LCH, but hit a problem. First, the backloading would subject the parties to larger initial margin payments at the clearing house. Second, the change would have a negative impact on Goldman Sachs' US stress test results, due to a specific scenario the bank had to model.
To resolve both issues, Goldman suggested bringing other currencies and products into the process.
"We had to come up with a bilateral portfolio between us, LCH and the non-core bank, which involved several different currencies, multiple cross-currency swaps and swaptions in another currency, to be able to minimise risk and costs for all the different regulatory and initial margin and client-specific constraints we were working with," says Paula Madoff, head of interest rates product sales at Goldman Sachs in New York.
Goldman Sachs also bought "a handful" of multi-line item exotic interest rate derivatives portfolios in 2016 from banks that were either looking to cut their exotics footprint, or their capital requirements.
Like many dealers, Goldman Sachs has been investing in new data analytics in an attempt to make its salespeople more effective – giving teams information on hit ratios and enquiries, as well as a salesperson's performance across products and sectors.
To crunch the numbers quickly, the bank has stored the data on the Apache Hadoop framework, where data files are split into large blocks and distributed across nodes. Programming code is then passed through the nodes to process the data in parallel with other nodes, improving efficiency.
But while data processing speed is important, the crucial thing was making the system accessible for salespeople to use it. Traditionally, the data was only accessible by specific engineers, so it was innefficient to run data enquiries on an ad hoc basis. Now, key salespeople are able to parse the data themselves, allowing them to check client needs and their own performance more regularly, but also to provide feedback on how the business should be slicing the data.
"Every time you wanted to run your hit ratios or evaluate how you're doing with a client, we'd have to call someone else, who would download the data, and it was cumbersome. Now salespeople have QlikView dashboards where it's very easy to pivot the data themselves in real-time," says Madoff.