Mifid II confusion, FRTB troubles and new LCH repo service

MIFID II pre-trade compliance stumps banks

LCH set to launch repo client clearing service

FRTB standardised approach threatens commodity hedging


COMMENTARY: Commodities in the firing line

The commodity sector is the latest to become vocally anxious about the implications of the Fundamental Review of the Trading Book, with the rules’ hardline approach to hedging causing fears that firms’ regulatory capital requirements are about to soar. Commodity traders using the standardised sensitivities-based approach (SBA) will have to match maturities perfectly between hedges and the underlying trade – or have to hold capital against the basis risk, even when, they argue, the position is in reality zero-risk.

It isn’t the first time the FRTB’s obsession with standardisation has come under fire from the industry. Earlier this year, dealers told Risk.net the SBA would encourage dealers to move en masse towards commonly traded benchmarks to avoid punitive risk charges – potentially causing price distortions, sell-offs and even market instability. Moreover, if – as a result of the FRTB – national regulators force banks to split their trading desks into national units, each with its own dedicated capital, many banks could pull out of smaller markets altogether, especially in Asia.

The alternative to the SBA is an internal model-based approach, the IMA, but this could also cause problems. Some trading houses warn the constraints the IMA places on model use mean that even IMA banks will be forced to converge on the most standardised instruments and underlyings, with the same crowding problems as those anticipated for the SBA. And European authorities working on the revised Capital Requirements Regulation, CRR II, which will transpose the FRTB into European Union law, now say banks will need three rather than two years to implement it. Otherwise, they will simply not be able to get their models in place. The delay would also give banks and regulators more time to address other problems with the FRTB, such as the profit and loss attribution test. It may even enable EU regulators to tweak the transposed FRTB rules to prevent some of the crowding effects.



Since 2009, US financial regulators have levied $155.8 billion in fines and penalties, or 98% of the global total over the same period – Corlytics: data reveals least-predictable regulators



“The Japanese, the Swiss and the South Africans are extremely client-orientated; they truly believe that if their clients are unhappy, their business won’t exist” – Jenny Knott, Nex Group

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here