In an effort to bolster its proprietary trading activities and tap into a global network of derivatives traders, First Union Corp. has turned over a portion of its swaps business to an outside management firm.
Charlotte, N.C.-based First Union has contracted for the trading services of Ferrell Capital Management, a six-year old trading-management firm based in Greenwich, Conn. The "renting" of trading services, known as outsourcing, is available to any bank that can set aside $10 million minimum.
John Evans Jr., managing director of trading and sales at First Union Capital Markets Corp., a subsidiary of First Union, said working with Ferrell Capital allows the bank to tap into a source of expertise that otherwise would not be available.
"It allows us to hire in essence very respected Wall Street traders who have proven track records that otherwise would not be availible to us," said Mr. Evans. "They would not be interested in working for us."
William G. Ferrell, president and chief executive officer of Ferrell Capital Management, wouldn't identify the company's clients but said they included four of the 20 largest U.S. banks - three among the top 10 banks - and three major European institutions.
"We run our operation like Wall Street banks run their proprietary trading operations," said Mr. Ferrell. "We allocate the funds to traders with specific specialties. All have different ways of attacking the market."
Ferrell Capital Management operates only in the highly liquid markets, said Mr. Ferrell. The firm trades in 20 major currencies, precious metals and U.S. fixed-income, foreign fixed-income, and foreign-exchange markets through three "managed-allocation portfolios."
The bank subsidiary has been working with Ferrell Capital for about two years.
Mr. Evans said First Union eventually planned to offer the trading services now managed by Ferrell Capital to its clients once it is satisfied the service works well.
The bank is waiting for a market recovery before it decides to expand its proprietary trading to customers, however.
"It came in negative for 1994, similar to the rest of the Street," Mr. Evans noted. "We have moved from volatile traders to arbitrageurs, which is more stable. We have changed the mix to make the operation more efficient."
Mr. Ferrell said his company could offer smaller banks similar services - such as computer modeling for risk management, daily marking-to-market, and portfolio diversification - as the larger investment bankers and money center banks, but for considerable cost savings.
"Our market niche is that we have many of the tools available to the larger banks and can offer them to smaller institutions that couldn't otherwise afford them," he said. "It's difficult for a lot of banks to hire individual traders to do what we do."
One of the more-appealing aspects of using Ferrell Capital's services, said First Union's Mr. Evans, is the diversification of talent available in one shop.
"By using Ferrel we have managed to put together a basket of solid traders that allow us to harness their expertise and get the most for our money," noted Mr. Evans.
Mr. Ferrell said his firm offered banks an inside perspective on the global markets from traders in New York, Chicago, London, Paris, and Lusanne, Switzerland.
"A bank doing business with us gets to use traders doing arbitrage, trading U.S. securities, foreign securities, and precious metals," Mr. Ferrell said. "We're renting traders and they're renting us as a trading manager."
