Watch Out for Sneaky Swaps Traders

There is a widespread belief that Wall Street traders use complicated derivative products to fool and defraud their unsophisticated clients, but you hear somewhat less about how Wall Street traders use complicated derivatives products to fool and defraud their unsophisticated bosses. Here are Securities and Exchange Commission and Commodity Futures Trading Commission enforcement actions against Swapnil Rege, who was hired by now-closed hedge fund Marinus Capital Advisors in 2015 because it “wanted to expand the Fund’s trading in interest rate products.” “Between 2015 and 2017,” says the SEC, “Rege was the Fund’s primary ‘rates’ trader and mainly traded interest rate swaps and swaptions,” which seems to mean that he knew more about the details of how rates products worked than anyone else there. And he got paid for performance, taking 8% of the profits he made.

That is a dangerous combination. If your boss doesn’t know the fine details of valuing interest rate swaptions, you can buy a swaption for $100 and then say “ooh look now it’s worth $150,” book a profit and take your cut. I mean, you shouldn’t, and it’s not quite as easy as that. For one thing, your boss might insist on getting outside quotes to value your swaptions: Even if he doesn’t know the first thing about swaptions, he can find out how much they’re worth just by asking brokers for prices. But you might convince him not to: