Isda, SMA and blockchain

The week on, April 8–14, 2016


ISDA AGM voices worries on internal modelling rules

SMA means bad news on op risk for Europe

BLOCKCHAIN for CCPs could cut repo liquidity costs


COMMENTARY: Reining in the banks

The derivatives industry met in Japan this week at the annual International Swaps and Derivatives Association general meeting. As's team found, the mood was not cheerful – in particular when delegates, including Isda chairman Eric Litvack, started pondering current and future regulatory reforms.

As well as worrying about higher costs, many speakers voiced concerns about regulators' plans to constrain their use of internal capital models. Internal models have already been ruled out by the Basel committee for use around operational risk  and credit valuation adjustments (CVA), and severely restricted for loans and other credit exposures. They are also anxious to get more transparency on the model approval process in areas where internal models can still be used.

Since the Basel II capital rules were first proposed, regulators have been working to the same general blueprint – that banks should follow simple and broad capital rules initially, but then (at least the larger and more sophisticated) develop and validate their own more sensitive and accurate capital models, allowing both more economical use of capital and less temptation to game overly broad rules. In a way, it's surprising this vision has lasted so long, especially after a financial crisis where the destructive power was vastly amplified by banks' over-reliance on faulty internal models.

The tide is now turning, but regulators and banks need to remember that the crisis was also an example of disastrous herd behaviour,  and a move back to entirely standardised models will make this problem worse rather than curing it.



An industry study challenged the Basel Committee's estimate that its fundamental review of the trading book would only lead to a 40% increase in capital; in fact the increase will be 50% for internal model banks and 140% for standardised approach banks



"Several Office of the Chief Economist [OCE] economists identified position limits as an example of a topic on which economic research is no longer permitted. As one OCE economist put it, ‘You can't write a report on something that destroys three years of (CFTC) work'. This issue arose unasked during an interview with an OCE economist. We immediately began asking other OCE economists about the issue. Several other economists confirmed their impression that OCE is now censoring research topics that might conflict with the official positions of the CFTC." – US Office of the Inspector General, reporting on the Commodity Futures Trading Commission



BoJ: unsecured overnight rate top pick for Ibor alternative
Isda AGM: New rate would complement rather than replace existing ones

LCH and dealers clash over loss allocations
Isda AGM: CCP equity should not be spared, say clearing members

Totally skewed: US annuity hedges magnify S&P volatility
Sales of fixed indexed annuities are soaring in the US. But dealers' hedging of the products is being blamed for pushing up S&P 500 skew, and their complexities are dampening banks' appetite to underwrite the instruments

Banks struggle to crack 'very complex nut' of IFRS 9
Move to expected loss impairment regime brings major challenges, say banks and accountants

Insurance Sifi rules squeeze the balloon on US annuities
Non-bank Sifis continue to sell assets, despite MetLife's court win

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