‘Significant exposure’, Swiss rates and SIs

The week on Risk.net, March 3–9, 2017

FED and dealers reading VM relief differently

SWISS overnight rates transition looks tricky

CLOSING Mifid's SI loophole threatens best ex


COMMENTARY: Europe’s impending car crash

European regulators and financial institutions have multiple interlocking reforms to look forward to this year, leading to fears they may trip each other up.

The review of the European Markets Infrastructure Regulation (Emir) has been pushed from March 14 to June 7. This avoids a clash with one set of deadlines – those surrounding the introduction of non-cleared margin rules – but lands it right in the middle of another, the mid-term review of the Capital Markets Union plan.

In January next year, meanwhile, the second Markets in Financial Instruments Directive (Mifid II) and its accompanying regulation come into force, with implications for the trading and reporting of a wide array of financial instruments. Any delay at this point, UK officials have warned, could lead to the deadline being missed – and crucial decisions on derivatives trading could be left until the last minute.

All this will be taking place during the two-year negotiation for the UK’s exit from the EU – a process due to start this month, according to UK prime minister Theresa May, who promised the Article 50 departure notification would be given before the end of March. The Brexit negotiations are likely to see Emir, Mifid II and other financial regulatory efforts used as bargaining chips, as the UK and the 27 other member states – the EU-27 – thrash out a deal on the shape of the post-Brexit financial system. It is not even clear what the UK’s objectives will be.

Much of the financial sector would doubtless prefer a business-as-usual approach, in which the UK preserves the equivalence rating that allows more or less step-free access to the EU. This would see UK regulators continuing to work in parallel with the EU after Brexit. But many UK politicians, including May herself, are also touting an alternative model of slashed taxes, deregulation and free trade with the rest of the world, with the intention of turning the UK into “the Singapore of Europe” (except probably with fewer immigrants).

In fact, in the two short years before the UK is forced out, it may achieve neither, ending up in an uncertain interim state while negotiations on free-trade agreements continue. Given the importance of the City of London to the EU’s financial sector, the future of regulation will be in question not only in the UK, but across the EU.



Based on end-December 2015 data,  Basel III and the Fundamental Review of the Trading Book would result in a weighted average increase of 52.3% for 'Group 1' banks (classified as large internationally active dealers); 50.9% for globally systemically important banks (G-Sibs); and 52.2% for other 'Group 2' entities. The end-June 2016 data implied an even greater uplift of 67.2%, 75.9% and 87.4%, respectively.



[After the 2008 crisis] suddenly our tried and tested quantitative fundamental oil models stopped working and we were left scratching our heads. Oil was clearly being driven by something other than physical supply-and-demand fundamentals – Ilia Bouchouev, Koch Supply & Trading


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