CCPs, loss absorption and yen Libor

CVA for CCPs? Arguments continue

ADDITIONAL TIER 1 rules may change after selloffs

FALLING YEN LIBOR endangers bond repacks

COMMENTARY: Dealing with CCP exposure

Disagreements continued this week over how to handle two aspects of central counterparty (CCP) exposure. Banks are split over whether to take credit valuation adjustment (CVA) charges on their CCP exposure; some argue CCPs should be treated like any other counterparty, others that their inherent safety makes CVA unnecessary. Many quants also argue their structure means that, at least, they should not be modelled the same way as other credit risks, as some rating agencies have begun to do.

Regulators are also beginning to raise questions about the practicality of derivatives CCP interoperability, a main goal of European authorities – it has worked well for equities, but may be impossible for derivatives.

Doubts are also gathering around Eurex's ISA Direct service, which promises direct buy-side access without the need for an intermediating bank – this should save capital, Eurex argues, but the banks are less sure.

QUOTE OF THE WEEK

"It's not the kind of systemic risk like a replay of Lehman Brothers: big institutions toppling over. [The concern] is that if things went really wrong and you got a big wave of [fund] redemptions... credit spreads would widen very substantially and you get a credit crunch. That would knock a percentage point or two off GDP growth"  – former member of the Federal Reserve Board

STAT OF THE WEEK

In the nine years since the housing crisis began, there have been 67 loss events in which financial institutions lost at least $1 billion. About a third of those multi-billion-dollar incidents involved the underwriting, securitisation and sale of RMBSs. Two of the top five loss events in April 2016 involved either the sale of RMBSs or the lax underwriting standards that made the products so risky.

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