AI, low-capital CFOs and the spread of uncertainty
The week on Risk.net, February 22–28, 2020
Prising open the black box of AI
Shapley values, Lime and other tools can help decipher machine learning’s output. It’s a start…
Fund securitisation makes capital vanish – and watchdog growl
Probe into possible “abuses” of CFO structure could hit wider investments, experts say
FX options see record volumes as yen goes off-script
Coronavirus outbreak and recession fears triggered frenzied trading in USD/JPY options
COMMENTARY: Storms ahead
FX volatility went away; then it came back. This week, Risk.net (and its newly launched sister title FX-Markets.com) looked at the reasons for the calm in foreign exchange markets – the longest low-volatility period in memory. Technology, market structure and macro conditions all played their part in answering the question posed by the article: Who killed FX volatility?
Yet perhaps it was too soon to use the word “killed”; this week Risk.net also looked at the reasons why a normally calm market – USD/JPY – entered a storm of frenzied activity, as bad macroeconomic news and the spread of the coronavirus epidemic undermined yen’s status as a safe harbour.
Worse news has followed – Japan, already on the verge of a recession, announced it would close every school in the country to prevent further spread of the coronavirus, strengthening fears of a downturn (though the yen has since recovered much of the ground it lost).
The situation is particularly noticeable in contrast with events in early January: the US killing of an Iranian general, and Iranian retaliatory attacks on US troops, led to fears of war, but FX markets barely moved – and, indeed, the tensions eased rapidly thereafter.
The recent move may have been exacerbated by significant existing short positions on dealers’ books, but the root of the problem is macroeconomic, hitting equity markets as well, with exchanges in both Europe and the US seeing falls this week. As industrial production is disrupted in China due to the virus, there will be knock-on effects on the financial health of companies dependent on imports from China – or, to put it another way, pretty much all of them.
And to market and credit risk, operational risks can be added. Travel restrictions are already interfering with business travel. Quarantine requirements or illness will produce significant key person risk, while financial pressure could increase the motivation for internal fraud and other forms of financial crime.
All these problems will be worsened by fear caused by uncertainty over the full extent of the epidemic, and fear caused by a lack of faith in the abilities of governments worldwide to deal with it.
STAT OF THE WEEK
JSCC is the only large Asian central counterparty (CCP) to allocate some of its [initial margin and cash default fund contributions] collateral to central banks – to the tune of 68%. SGX says it has access to its home central bank, but it doesn’t currently hold any assets there. It’s unclear whether HKEX has access to its central bank or not.
QUOTE OF THE WEEK
“Regulators don’t have the right to require the administrator to replace the Libor rate with the risk-free rate on the screen. The European Benchmarks Regulation does not allow that” – European bank regulatory expert
Further reading
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on 7 days in 60 seconds
Bank capital, margining and the return of FX
The week on Risk.net, December 12–18
Hedge fund losses, CLS and a capital floor
The week on Risk.net, December 5–11
Capital buffers, contingent hedges and USD Libor
The week on Risk.net, November 28–December 4
SA-CCR, SOFR lending and model approval
The week on Risk.net, November 21-27, 2020
Fallbacks, Libor and the cultural risks of lockdown
The week on Risk.net, November 14-20, 2020
Climate risk, fixing Libor and tough times for US G-Sibs
The week on Risk.net, November 7-13, 2020
FVA pain, ethical hedging and a degraded copy of Trace
The week on Risk.net, October 31–November 6, 2020
Basis traders, prime brokers and election risk
The week on Risk.net, October 24-30, 2020
Most read
- Industry urges focus on initial margin instead of intraday VM
- For a growing number of banks, synthetics are the real deal
- Did Fed’s stress capital buffer blunt CCAR?