LIQUIDITY RISK concerns grow around CCPs
TECH RANKINGS: compliance needs drive IT demand
BUY SIDE gets pricing edge from data
COMMENTARY: The threat of innovation
Almost 10 years after the start of the financial crisis, international financial markets continue to innovate at impressive speed. Peer-to-peer repo is a response to banks being seen as choke-points in the movement of liquidity from cash-rich corporates to hedge funds in need of liquidity. Swiss broker Tradition plans to host $12 billion in volume a day on its peer-to-peer repo platform by the end of this month.
Tradition claims it has received overwhelming support from buy-side firms on both sides of the putative trades. Under Basel III, the increasing cost and complexity of transacting through banks may push the market in this direction. But some worry it will not function without a player taking on the banks' traditional role in liquidity transformation, and warn about the operational burden of transacting peer-to-peer.
Peer-to-peer repo is new and unfamiliar, but elsewhere, banks are fine-tuning a much older trading model. Cross-currency swaps, thanks to a carve-out in the relevant margin rules, require far less margin when bilaterally traded than they do when centrally cleared. The massive principal exchanges involved are still a problem though, and dealers have begun talks on how to reduce these.
A third story, meanwhile, serves as a valuable warning about the dangers of rapid evolution in the structure of markets. Central clearing was instigated as an answer to the problem of counterparty credit risk. To a large extent it has succeeded, but at the expense of liquidity risk. For the largest banks, this should be far more of a concern – counterparty defaults are not bank-killers, but uncontrolled margin calls from clearing houses could well be.
STAT OF THE WEEK
QUOTE OF THE WEEK
"Without better pricing data, the calculating and holding of risk is next to impossible. Asking a market-maker to consistently provide liquidity in a market with no visible pricing is like asking a taxi driver to set the fare before knowing the destination. The market-maker is very susceptible to charging $20 for driving someone from Manhattan to the Hamptons" – Chris White, ViableMkts
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