ABUSE OF STRUCTURED FINANCIAL PRODUCTS- Misusing Basket Options to Avoid Taxes and Leverage Limits MAJORITY AND MINORITY STAFF REPORT

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trades were completed if RenTec were merely suggesting rather than executing the trades. It is
also difficult to understand how the company offered “suggestions,” since virtually all of the
trade orders were initiated electronically, using RenTec’s proprietary algorithms, and were
executed immediately using the banks’ trading software and direct market access, typically with
no human intervention on either side.
Bearing the Rewards and Risks. Within the MAPS and COLT structures, RenTec bore
all of the significant risks and rewards due the owner of the securities positions held in the option
accounts. Subject to trading and financing costs, all of the profits accrued from the trading in
each option account were paid to RenTec when the option was exercised. No portion of the
trading profits was paid to either bank, which received only financing and fee income. In
addition, except for catastrophic market events, RenTec bore all of the risks associated with the
ownership of those assets. For example, any trading losses served to lower the value of the
affected option account and lower the final option payoff when RenTec exercised the option.
The only risk faced by the banks was a catastrophic market event that depleted the value of the
option accounts, an event that never occurred for any RenTec options. One RenTec analyst
wrote that, even if a threshold level were breached requiring bank assumption of losses in an
option account, losses would be minimal since the portfolio was “well-diversified, marketneutral,
and with low liquidity imbalance,” and “could be liquidated slowly if required.” 290
Paying Ownership Costs. Further, RenTec bore the day-to-day costs associated with
ownership of the assets in the option accounts, even though the assets were held in the name of
the banks providing the accounts. Each option had a “trade confirmation,” which is a written
acknowledgment provided by the bank indicating that a trade has been completed, and which
included details such as the date, price, commission, fees, and settlement terms of the trade. A
section in the confirmation entitled, “Basket Cost” at Barclays and “Basket Income and
Expenses” at Deutsche Bank, identified the account expenses and subtracted the costs directly
from the account. 291 The costs charged to RenTec included trade transaction fees, including
ticket charges and short sale borrowing fees, reflecting the costs incurred by the bank for
completing each individual transaction executed in the account. Transaction fees are common
expenses in a traditional client brokerage account, but are normally absent from proprietary
trading accounts operated by the bank itself. 292 Similarly, the trade confirmations charged
RenTec financing fees, which are common in client brokerage accounts, but not in a bank’s own
proprietary trading accounts.
290 Email from Daniel Koranyi, RenTec, replicated in 11/19/2008 email from Colin Masson, RenTec, to Daniel
Koranyi, “DB counteroffer,” RT-PSI-00368695-697.
291 For the Barclays confirmations, see, e.g., 12/21/2005 Barclays letter agreement with Badger Holdings L.P.,
“Option HH,” BARCLAYS-PSI-002879-896, at 887-888. For the Deutsche Bank confirmations, see, e.g.,
12/16/2007 Deutsche Bank letter agreement to Mosel Equities L.P., “‘OUTPERFORMANCE’ BARRIER OPTION
TRANSACTION—Cash Settled, Linear Amortizing Premium—DB Reference No. 941-50053,” DB-PSI 00000320-
337, at 327.
292 These costs were enumerated in the Barclays confirmations and in the Deutsche Bank investment advisory
agreements. See, e.g., 12/21/2005 Barclays letter agreement with Badger Holdings L.P., “Option HH,”
BARCLAYS-PSI-002879-896, at 887-888; 3/14/2002 “Investment Advisory Agreement” between Deutsche Bank,
London Branch, and RenTec, DB-PSI 00123209-221, at 210.