XVA, variation margin and the Mifir deadline


XVA BURDEN grows for ring-fenced banks

VARIATION MARGIN deadline fails to clean up CSAs

EC to miss Mifir equivalence deadline


COMMENTARY: Another awkward divorce

The January 2019 deadline for UK banks to separate their retail and investment operations – known as ring-fencing – seems disturbingly close. Even a year ago, the industry was feeling time grow short. Now, some of the largest banks in the world have less than two years left to deal with a list of operational and legal problems, not least surrounding their derivatives books. Transferring derivatives counterparties en masse is a big enough challenge, but the list of issues under the 'XVA' heading, covering various derivatives valuation adjustments, is bigger still. Most banks have decided to separate out their retail operations into a new company and leave the original bank holding the rest of the business, under a single group – this presents fewer legal problems than the alternative of relocating the investment bank into a new legal entity. But cutting off the investment arm from cheap retail funding has caused problems too. Higher funding costs will drive up margin and funding valuation adjustments (MVA and FVA), and it is also possible the split will reduce netting for swaps portfolios, increasing credit valuation adjustment (CVA) costs. The lack of a traded credit default swap on the new entity will make calculating CVA still harder.

Aside from this, there are other operational problems. The split itself will be a very demanding ordeal for major banks – the costs could run into billions. January 2019 is also the deadline for the introduction of total loss-absorbing capacity (TLAC) requirements, which could interact with the ring-fencing rules in unexpected and costly ways.

The problem, politically, is that ring-fencing will prove its worth only in a very particular set of circumstances. Without a crisis, of course, it is useless. And if a crisis occurs and the major UK retail and investment banks all survive – perhaps thanks to other regulatory reforms such as TLAC, Basel III and so forth – ring-fencing appears equally unnecessary. If, on the other hand, the crisis is so severe and so systemic that it brings down retail banks as well, ring-fencing will have been useless. The only thing that can justify the whole project is a crisis that is just bad enough. In the absence of one, the risk is that the ring-fencing requirement will be gradually or suddenly eroded again, under pressure from banks keen on regaining their universal status; in which case, the retail banking industry will once more be at risk, and two sets of transition costs will have been spent in vain.



Since 2011, the oil market has seen eight weekly position changes of more than 100 million barrels of oil from the speculative community, and six of those changes have occurred since August 2016 – representing moves of 10–15% driven purely by position adjustments.



Which is more systemic, the central counterparty (CCP) or the dealer? Should the CCP be stayed from liquidating the positions of a failing major dealer in order to improve the likelihood the dealer can be stabilised and reopened for business? Or should the CCP be permitted to stop the potential growth of losses to its other systemic clearing members by using its contractual right to liquidate the positions of a failing member? Because most swaps are now centrally cleared, and because major dealers depend critically on the continuity of their swaps books, heavy contagion risk arises either way” Darrell Duffie, Stanford University

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