FRTB, Eurex and swap spreads

The week on, March 25 – 31, 2016


NEGATIVE SWAP SPREADS shut down motor behind US flows

POST-LIBOR squeeze threatens benchmarks

METLIFE's Sifi win undermines global framework


New market risk capital rules offer banks a choice: they can use a revamped standardised approach to calculate their capital requirements, or the internal models approach (IMA).

Except it's not a real choice. The IMA is expected to generate lower capital numbers in most cases – possibly much lower – making it the obvious option. But it has to be applied at the desk level, and regulators first have to approve it.

Before even getting to that stage, any risk factor has to meet minimum data standards in order to be deemed modellable: prices have to be based on real transactions, or committed quotes. A total of 24 of these are required, covering the preceding 12 months, with no more than a month's gap between two observations.

Stories this week focused on some of the implications. In Asia, banks are starting to worry that many of the instruments they trade will not meet the data standards. Fears are focused on longer-dated rates trades and emerging market currency pairs.

"If people move away from certain non-modellable risk factors then it could kill the market," warned Brian Lo, head of market and liquidity risk at DBS.

Where data is sufficient, banks need to pass two other tests to gain regulatory approval: a comparison of front-office and model-generated profit and loss, and a backtest. It means banks might want to structure their desks in a way that gives them most chance of passing the tests: illiquid or hard-to-value instruments might be broken out and treated distinctly, so as not to drag an otherwise-modellable desk into trouble. That might be frowned upon by regulators, so it's not a topic banks are keen to discuss.

"It is a very personal and firm-specific choice," said a source at one UK bank. A London-based consultant put it a little differently: "People are getting very creative. A lot of interesting things are happening."

The issue came up in a live, hour-long webinar on March 30 – an archived version will be available online in the coming days.

Meanwhile, Deutsche Börse-owned Eurex Clearing hit the headlines twice in the past week, first for a pioneering move to launch direct membership for buy-side firms, and secondly for all the wrong reasons – as its margin models were blamed in a Swedish court case for contributing to the 2010 collapse of Stockholm-based HQ Bank. An expert report on derivatives margin requirements, commissioned by the plaintiffs, claimed Eurex did not sufficiently recognise vega, strike risk and wing risk. The clearing house changed its equity derivatives margining approach after HQ's collapse, though not because of that episode, according to a spokesperson.


Sources close to Eurex's ISA Direct predict that allowing buy-side firms to face the clearing house directly could produce an 80% cut in the capital currently consumed by clearing banks, which traditionally sit between their clients and a CCP.

"That's when I lost faith in central clearing organisations, because their models were not up to speed. The margin call Eurex asked for didn't correspond to the risk. The bank eventually lost its licence and went belly up. I am not impressed by CCPs" – A senior executive at a bank of which collapsed HQ Bank was a client in 2010


US derivatives users cheer hedge accounting rejig
Rule change ends years of uncertainty and piecemeal reform

Industry slams EU equity derivatives disclosure proposals
"The rules are based on assumptions that are incorrect," says Isda

FRTB data standards seen as threat to emerging markets
Need for 'real' prices will limit use of models, increasing capital burden

Blockchain tipped as fix for margin segregation
ISAs could move to distributed ledgers within 18 months, Barclays technologist claims

Smaller firms get boost on timing for non-cleared margin
Counterparties will be able to offset extra collateral calls, says source close to EBA

Liquidity adds to institutional zest for hedge fund clones
Demand is high for alternative ETFs, despite underwhelming performance

Lenovo turns to dim sum market to reduce forex hedging costs
Rising cost of CNY forwards and tighter regulation encourage renminbi funding

Phibro CEO eyes opportunities in banks' retreat from energy
Ex-Morgan Stanley commodities chief Greenshields revives famed trading firm

How to get maximum value from power plant hedging
Dynamic hedging is becoming more common among plant operators

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