Lehman Brothers' European ETF business:
With the success of
the ETFs in the US and their arrival on the old continent, Lehman
Brothers needed to build capacity and presence. I was asked to
build the firm's European ETF trading activity.
is conceptually simple to understand, its implementation was expected
to meet numerous practical difficulties:
Market of the global products would be intensive operationally:
the antiquated settlement systems would have to cope with some of the
worse king of program trades: multiple countries, currencies, tax and
regulatory environments, settlement on non-standard dates, out of currency
(but free of payment!) and via the Asian and US subsidiaries
would be required between entities. This had tax, compliance and
accounting consequences. It was also going against the firm's
costly restrictions on reciprocal balance sheet usage
Due to the
time zone differences, the underlying indices would have to be quoted
on the Secondary Market while the relative markets were closed. That
wasn't preventing the numerous exchanges to place stringent
quoting requirements, enforced with hefty fines and sanctions.
Lehman had no quoting equipment, and no resources to
business heads are to substantiate the benefits and
risks of new activities in front of a multi-disciplinary panel of departmental
managers called the "New Product Committee". Fact is that much
simpler projects had met painful rebuffs in the past.
meetings between the various European operational departments (Middle,
Back, Finance, Tech Support) to suggest a settlement procedure.
Coordinated meetings with
Compliance, Tax and Accounting to find an optimal derivative structure
to hedge the bulk of the positions. Chose futures both for pricing
information and to hedge the residual amounts.
Coordinated meetings with
the other regions at the Operational and trading level to finalize the
Created the Excel
infrastructure to download and maintain the weights of the new
indices. Combined that information with the ETFs creation/redemption
files to compute the fair values of the products
Used my good
relationship with the IT managers to obtain the implicit allocation of
"3/8th of a developer" to create an interface
with the exchanges. Used my IT proficiency to make Excel drive that interface into quoting
the ETFs as per the Exchange requirements
resulted from this large team effort:
Product Committee fully accepted the project, very much like a
was smooth, and the firm is actively quoting and trading the iShares, IndexChange, UBS-Fresco, CSAM, SPYs and
The activity has
generated $2 Mn of commissions in the first half year of 2003.
I was invited by
the Swiss Exchange Authorities to participate in creating the ETF