CCPs, loss absorption and yen Libor

The week on, May 6–12, 2016


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.



"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


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.



Dislocations highlight risks of commodity ETNs
Notes face scrutiny after problems with Barclays' OIL and GAZ products

Enria: new legislation can help bolster AT1 market
The EBA is also reconsidering its advice to the European Commission on the treatment of CVA risk

'Cherry picking' claims fly in CSA rate floor negotiations
Traders accused of self interest in negative rate floor discussions

Forex market to adopt global code of conduct by end-Q3
While participants are excited about the conduct guidance, they say firms' internal behaviour is what will ultimately create change

Partial reprieve for package trades in Mifid II deal
Some trades will face transparency, but the outcome "could have been worse"

End-users face extra unwind costs from CSA rate floors
Dealers demanding compensation for extra funding costs

Basel interest rate risk disclosures "problematic"
IRRBB could reveal commercially sensitive information and mislead analysts

Structured products liquidity under threat from EU reforms
New regulation could shut down secondary markets in outstanding products

US exchanges will be caught in Priips dragnet, lawyers warn
Futures and options sales to EU retail clients will need key information documents

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