Two veterans of the derivatives business have joined forces, forming a risk management consultancy that caters mostly to banks.

For some time, Tanya Stylbo Beder and Leslie Lynn Rahl had noticed that the client lists of their separate risk management companies often overlapped.

But it was only after being stuck together in a car for three hours on the way to see a mutual client one day last year that the idea of forming Capital Market Risk Advisors occurred to them. The firm opened for business last month.

"We sort of reached a critical mass with our two companies. We both needed larger organizations," said Ms. Rahl. "Besides, it was a long car trip."

Ms. Rahl is one of the pioneers in the swaps and derivatives business, having set up Citibank's risk management department in 1983.

She started the bank's interest rate cap, collar and floor business. She then struck out on her own, forming Leslie Rahl Associates in the early 1990s.

Ms. Beder, meanwhile, began her career in 1977 at First Boston Co. in mergers and acquisitions, and was a founding member of its swap group.

She went on to be a trader and product specialist in charge of derivatives transactions for financial institutions.

Ms. Beder started her own firm, called Capital Risk Advisors, in 1987.

The business of their new firm is now is evenly split between dealers and end-users, they said.

Among their first assignments was conducting an assessment of joint venture derivatives opportunities for a large financial institution, along with helping to establish global risk management protocols for the company's newly formed derivatives unit.

Another assignment had them advising an international end-user in the unwinding of a complex leveraged transaction, which contained a multi-million dollar embedded loss.

Ms. Beder said end-users should require that derivatives be presented and approved in their deleveraged equivalent.

For example, a $100 million derivative transaction that is leveraged 15 times should be presented to a bank's board as a $1.5 billion transaction, rather than a $100 million transaction.

Ms. Beder also noted that with the evolution of the marketplace comes new and unexpected problems.

Up until about twenty years ago, "credit risk was the only problem the industry had to worry about," Ms. Beder reflected. "But since the globalization of the industry, all kinds of risks have popped up."

Ms. Rahl said the new products created to address these risks tend to be combinations of existing tools.

"On a daily basis, people are combining options and swaptions and caps and creating new structures," Ms. Rahl said, adding that while the market is always evolving, there rarely is a totally new instrument introduced.

"There is constant innovation in the marketplace," said Ms. Rahl, "but it tends to use established building blocks. Almost all derivative structures are combinations of pieces."

Identifying which risks to hedge is an immense challenge, Ms. Beder added.

One of the key services that Capital Market Risk Advisors provides its clients is the implementation of risk oversight programs. This, Ms. Beder said, is essential for banks - especially end-users- in helping them establish high-level reporting of derivatives usage to management and boards of directors.

"Every dealer and end-user should have specific written policies regarding the use and execution of derivatives," said Ms. Beder.

"End-users should require satisfactory detailed information from dealers seeking their derivatives business so that there is sufficient understanding of the structure of a transaction prior to execution," she added.

Ms. Rahl and Ms. Beder bristle at the suggestion that derivatives are more risky than other hedge tools. Ms. Beder last month testified to that effect before the House Telecommunications and Finance Subcommittee.

Capital Market Risk Advisors estimates the global derivatives market stood at a notional amount of $18 trillion at year end 1993. Even with all the highly publicized losses over the past year, the loss rate still amounts to less than one-twentieth of 1%.

Even if you estimate the size of the market by replacement value, Ms. Beder said, the losses still amount to only 1.1% of a $540 billion market.

"I believe that the majority of risks are understood and controlled by dealers and end-users. This is borne out by the extremely low level of derivatives losses to date," she said.

"In the dealer community the knowledge base is very high," noted Ms. Beder. "But the market is a high punisher. It's not the instruments themselves. The derivative is the vehicle, not the driver," she said.

According to Ms. Beder, it is becoming more expensive to be a major player in the derivatives market. As a result, some banks will be forced to become "boutique dealers," specializing in certain instruments and not being able to offer the full spectrum of derivatives to their clients.

Some may even be forced to exit the business altogether, she said.

"We're getting close to a forced tiering on the dealer side," Ms. Beder said.

"It takes several hundred million dollars to stay in this business. You have to maintain incredible liquidity. You can't have all your capital tied up in loans and still expect to compete."

Ms. Beder also noted that the market will be hard-pressed to maintain its current explosive growth.

She predicted that once the domestic market slows, banks will look to the emerging markets for future growth - especially Russia, Latin America, and Mexico.

"For some people those are very attractive markets," she said. "Derivatives are a natural evolution in a marketplace."

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