FTRB, energy market liquidity and variation margin

The week on, December 2–8, 2016


FRTB SURVEY reveals continued shortcomings

LIQUIDITY problems for energy hedgers

VARIATION MARGIN deadline getting tight for dealers


COMMENTARY: Clients and compliance

Back in September, the prospect of complying with the Isda variation margin rules by March 1, 2017 was causing banks to contemplate drastic measures. One US bank counterparty risk manager insisted: "There can be no negotiation. For anyone. We don't have the lawyers or the time. It has to be one CSA – the same CSA – for everyone. And everyone just has to hold their nose and sign it. Because if they don't, there's no chance we're going to get through this in time. And the lesson from the regulators is no-one is getting a delay." A month and a half later, with work on the repapering exercise in full swing, asked how this approach was going – "It didn't survive the client contact phase," he admitted.

The same could be said of another aspect of what is proving to be a highly demanding compliance exercise – handling the daily payments themselves. The minimum transfer amount (MTA) rule was designed to reduce the operational load of compliance by setting an exposure threshold below which margin need not be paid; but disagreements over its implementation are leading some funds to insist on a zero MTA.

Banks are being forced to focus their efforts on the most active subset of clients – and even for these, meeting the March 1 deadline is doubtful, especially as many are digging in their heels on any form of CSA repapering. The initial margin rules that came into force on September 1 have been praised for their gradual rollout – smaller users will have some time before they have to comply. Variation margin, on the other hand, is supposed to happen all at once.

In some ways, it's a tragedy of the commons – each individual customer believes they will benefit from holding on to their own CSAs rather than switching to a more standardised agreement, as suggested this week by the Isda board. But the cumulative effect could be extremely systemically costly – and risky – as banks with limited resources seek to repaper thousands of agreements, as well as educate their customers about rule changes of which many are apparently still ignorant.



Six of the 11 banks surveyed by estimated between 20% and 100% of their desks were likely to fail the FRTB profit and loss attribution test.


"The major drawback of the current methods in designing structured products is the disconnection between incentives of structurers on the one hand, versus other stakeholders in an organisation, such as creditors – or in the economy, for instance, taxpayers – who may have a divergent appetite for risk. The risks of model failure, and its costs, are not explicitly part of the modelling process or consideration for structurers, and risk management has to intervene as a reaction to this" - Michael Jacobs, Accenture



Mixed views on Dodd-Frank rollback
No need to dump central clearing and electronic trading mandates, market participants say

Isda Amend faces rival in CSA repapering effort
AcadiaSoft to launch new tool in January, but protocol approach attracts wider criticism

Why risk aversion should be built into product structuring
Irrational behaviours that creep into product structuring can be controlled mathematically

CSRC: commodity futures speculation not moving spot prices
Eye-watering one-day moves on China spot commodity markets due to "supply and demand"

OTC market resisting swap futures threat
Swap futures yet to break out, but backers see margin, accounting and Citadel as tailwinds

US banks fear margin rules could hit emerging Asia liquidity
Unequal margining requirements may be a turn-off for local counterparties

Energy Risk Asia Awards 2016: the winners
BP takes energy dealer of the year after ramping up third-party and structured business

Buy-side Awards 2016: The winners
ICI is best pension fund; Rothesay named top insurer; Vanguard wins asset management risk manager award

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