Where have all the derivatives specialists gone?
1 October 2007
Who said the job of a derivatives lawyer is boring? Whoever it was should speak to Allen & Overy (A&O) US derivatives head Jeff Golden, who furnishes all budding derivatives lawyers with a crib sheet entitled 'How to succeed at a derivatives cocktail party without really trying'.
Cocktail parties certainly sound far more exciting, not to mention glamorous, than a life of number-crunching and market watching, but in truth the sheet has been designed to help new derivatives lawyers get to grips with the countless tricky technical issues that surround the topic.
And that really is the crux: ultimately derivatives are extremely complicated and technical financial instruments. The result of this complexity means there is currently a dearth of experienced lawyers working in the sector, making it the perfect area in which to carve out a niche.
Magic circle firms boast large derivatives teams in their London and worldwide offices, but attracting new trainees to this specialist area of finance is proving to be difficult.
In light of recent market volatility and the uncertainty of the credit markets, derivatives, in their various guises, could potentially prove vital in ensuring that markets remain buoyant - and that lawyers continue to receive instructions.
Why, then, are firms struggling to recruit lawyers into such a cutting-edge area? And what are firms doing to reverse the trend so as to take advantage of this up-and-coming area of the law?"It's a technical topic and the clients typically have an extensive and very technical knowledge of the subject," explains Linklaters derivatives partner Simon Firth. "Investment banks need people with a serious depth of knowledge for high-level derivatives transactions. It's hard to train people up and hard to find good lawyers in this area."
Over the past few years derivatives have steadily risen to become a crucial aspect of many financial transactions, while at the same time it has become increasingly difficult to train new generations of lawyers to the standard investment banks such as ABN Amro and Goldman Sachs require.
However, at the heart of the issue is the type of derivatives work investment banks require their lawyers to deal with, confesses Firth.
"They keep straightforward transactions in-house," he says. "They have the expertise and all the various types of standard documentation required to carry out these deals. It's only the high-level, complex transactions that private practice lawyers are hired for."
Arguably that is as it should be: in-house teams deal with the run-of-the-mill work and turn to their well-paid private practice lawyers for complex work.
But that is why training up derivatives lawyers capable of dealing with the demands of investment bank transactions is a catch-22: it is not possible to gain the knowledge of complex structures without learning the basics, but the easy and basic transactions are not likely to cross the paths of the junior derivatives lawyer because they are all done in-house.
A&O, Clifford Chance and Linklaters all boast derivatives teams that number into the hundreds in London alone, but the fact remains that there are far fewer partners deemed successful in the field.
"There are probably only seven partners in the City succeeding in derivatives," claims one magic circle partner. "I'd say there are three at A&O, three at Clifford Chance and one at Linklaters. Although the number of associates is high, the reality is very different." In recent years law firms have steered towards combining structured finance lawyers and derivatives lawyers.
"You often find that many firms will classify derivatives in a different way. You'll find that what some firms will call a derivatives lawyer is really a securities lawyer," says A&O derivatives partner Simon Haddock.
Among the large derivatives and structured finance teams at the magic circle, very few are rated highly.
Among those highlighted are A&O's Haddock and derivatives guru Golden, together with rising star Richard Tredgett. Clifford Chance boasts partners Simon Gleeson (formerly of A&O) and Claude Brown in its camp, while Linklaters' Firth was highlighted as one of the best.
"I don't think you can consider anyone else as being particularly strong," admits one partner. "The magic circle has the monopoly of good partners and there are very few of them.
"I can't imagine the next tier of firms will be able to break into this area of finance."
Retention of promising associates in magic circle derivatives teams does not paint a positive picture either. Investment banks have begun to pick off strong associates in the past decade, taking stars such as James Clarry, who moved from A&O to Royal Bank of Scotland, and Jonny Cheatle, who joined Goldman Sachs from the same magic circle firm, both during the last two years.
"It's been common for some time for strong private practice associates to get snapped up by investment banks," explains Gleeson. "It's not surprising that an associate being offered three times their current salary would seriously consider moving in-house."
With top-notch magic circle partners such as Gleeson, Golden and Firth to emulate, it is hardly surprising that younger talent is slightly put off when it comes to the challenging world of derivatives.
Those brave enough and able enough to build up the knowledge required find it is not long before an investment bank quickly lures them away with the promise of sizeable salaries.
Despite investment bank interest in magic circle associates keeping the numbers graduating to partnership level down, partners remain positive about the future of their derivatives teams.
"I see these guys moving to investment banks as a testament to our practice group," argues Golden. "Investment banks want the best of the best, so it shows we're clearly training our junior lawyers well." Most firms admit that it has been difficult to recruit derivatives lawyers since the instruments made their debut in the financial markets in the 1980s, but Golden remains resolute that A&O does not suffer from a dearth of talent in the derivatives sphere.
"You have to have a strong training programme," he explains. "We have the right people to train new lawyers here and we feel this has been a success for us."
Both A&O and Clifford Chance have been instrumental in the development of the global derivatives market, playing a key part in the structure of documentation and working closely with the International Swaps and Derivatives Association (ISDA).
Earlier this year (16 April) The Lawyer reported that Clifford Chance was breaking new ground by creating the first sharia-compliant ISDA master agreement, devised to encourage sharia-compliant investment in the derivatives market.
The magic circle firm boasts a 10-year relationship with the ISDA, advising on a number of agreements that are shaping the derivatives landscape.
"The derivatives market has grown substantially," says Gleeson, adding that "we do need more strong derivatives lawyers in private practice."
While A&O believes it is ruling the derivatives roost, others will admit that the search for fresh lawyers ready and willing to take on this complex world continues.