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.
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