Lesson 21 of 25 · 7 min

A family office, 2021: the sequence over one week

When several sellers hold the same hedge, the first block sets the price and the rest receive what is left.

The week of 22 March 2021 is worth laying out in order, because every step is a mechanism from an earlier lesson and none of them is a surprise on its own.

The sequence, as widely reported:

One of the largest holdings fell sharply early in the week, following a large new share offering by that company.
Mark-to-market losses on the swaps moved against the family office, and collateral calls were made by several prime brokers on 24 and 25 March 2021.
The calls were not met.
On the evening of 25 March 2021 the financing counterparties discussed an orderly, coordinated sale; no agreement was reached.
From 26 March 2021 several dealers sold the hedge shares independently, in block trades, over a few days.

The outcome followed from the order of those sales rather than from the size of the position. Blocks reported at tens of billions of dollars in total were placed into the market, the affected shares fell by around half, the family office ceased operating, and losses across the financing counterparties were reported at roughly ten billion dollars in total, the largest single one at around five and a half billion. Legal proceedings followed.

The coordination problem is the general lesson. If all holders sell together at a negotiated discount, each takes a moderate loss. If any one of them sells first, it gets a better price and leaves a worse one for everybody else — so each has a reason to move first, and moving first is exactly what makes the aggregate outcome worse. No agreement was available because the incentive ran against it.

A hedge shared among several holders is not a hedge against each other. The first seller is hedged; the rest are inventory.

Key terms

Block trade: A large sale negotiated off the public market and priced at a discount to the last traded price. The discount is the cost of immediacy.
Coordination problem: A situation where the best collective action is a joint, orderly sale, and each participant's own best action is to sell before the others.
Mark-to-market call: A collateral demand arising from a change in a position's value rather than from any breach. It is due on the schedule in the agreement, usually the next morning.

Worked example

The price of going second

Illustrative figures scaled down so the arithmetic is followable; they are not the reported amounts. Dealers collectively hold 2,400,000 of hedge shares in one name; one sells 600,000 first at a 6 percent discount, the rest sell after the price has fallen 22 percent and at a further 8 percent discount.

First seller's proceeds: 564,000
Marked value of the remaining 1,800,000: 1,404,000
Proceeds of the later sales: 1,291,680
Total realised: 1,855,680
Shortfall against the starting marks: 22.7%
Recovery per unit, first versus later: 94.0 cents against 71.8 cents

Going first cost 6 percent and going second cost 28.2 percent. That gap, not the total size, is why no coordinated sale was agreed.

Check yourself

Dealers hold 1,500,000 of the same hedge. One sells 500,000 at a 5 percent discount; the rest sell 1,000,000 after an 18 percent fall and at a further 7 percent discount. What is the total shortfall?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.