Swaps margining, negative interest and repacks unpacked

The week on Risk.net, August 19-25, 2016

MARGIN DEADLINE means trouble for banks

SGX to charge negative interest to clearing members

REPACK structures revealed


COMMENTARY: Negative connotations

Negative interest rate policies, long a concern of the central banking world, are increasingly relevant in the derivatives markets. The latest evidence, as Risk.net revealed this week: SGX is to start charging negative interest on excess yen and euro cash collateral, arguing "the interest rate differentials between some of these currencies are such that it's not equitable for us to take negative-yielding currencies as excess margin in yen and euro".

Clearing members are likely to feel pushback if they try to pass the costs on to clients – as indeed will banks if and when they are forced to impose negative interest rates on business or retail account holders. Earlier this year, negative interest rates caused problems elsewhere, as banks with credit support annexes in place wrestled with the possibility of an "implicit" zero floor.

It is new territory for the financial world, but banks and depositors should remember negative interest rates are not the problem, merely an (attempted) solution. Central banks have been driven to this extreme by the stubborn refusal of growth (and inflation) rates in many major economies to rise much above zero – deposit levels have not fallen significantly in eurozone banks despite a long period of abnormally low interest rates, and lending is strong. Bank profitability will nevertheless be squeezed by long periods of negative policy rates, as are now in force in many countries, and SGX was not the first clearing house to pass along negative interest costs.

But, again, this is all just a manifestation of the root problem – sluggish macroeconomic performance. Many economists at the International Monetary Fund and elsewhere have been arguing for some time that the time has come for fiscal authorities to take a hand. A return to sustained growth would be as good for the derivatives market as for the rest of the economy – sadly, it doesn't look imminent.



According to the Chinese State Administration of Foreign Exchange (Safe), sales of forex forwards were just 60.9 billion yuan ($9.2 billion) in June, compared with 167.3 billion yuan 12 months earlier. Instead, corporates are looking to options to meet their needs.



"There are very few malware developers in the world – maybe 250 to 300. Malware is difficult to write. So you develop the malware, you use it for four to five months, then you sell it and allow a lot of other people to use it, to blur the evidence" – Christian Karam, director of threat intelligence, UBS



UK resists expansive view of Mifid II position limits
FCA suggests limits shouldn't apply to OTC trades between non-EU entities

Dealers grapple with netting valuation adjustments
Some banks are expressing netting uncertainty as a fair value adjustment to CVA, a practice that attracts regulatory capital add-ons

FVC analysis: leveraged return vs dual directional products
Offering investors gains on the downside can present risk management headaches

Bank size and tail losses skewing SMA calculation
Op risk researchers criticise logic of planned new capital method

Banks fear costs from loss of AAD under simpler FRTB rules

Trading book regime may force use of more expensive and time-consuming ways of computing risk sensitivities

BNP Paribas shakes up commodities business
Soulami shifts to green-energy role after 10 years as commodity derivatives chief; other moves at BMO, JP Morgan and Phibro

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