Op risk capital, quant year in review, bad news for Dutch prop traders

The week on Risk.net, December 9–15 2017

7 days 161217

Unlucky for some: Europe’s war on 13 Dutch prop traders

Liquidity hit feared as FlowTraders, IMC, Optiver and other non-banks face bank-style capital rules

Basel III: final op risk framework leaves banks guessing

Analysis suggests big capital savings on average, but uncertainty persists over uneven implementation

Degree of influence, 2017: Quants dissect initial margin

Initial margin, optimal execution and applications of machine learning were the hottest topics of 2017


COMMENTARY: Basel’s op risk capital conundrum

At first sight, the revised Basel III framework appeared to bring good news to banks hoping for cuts to operational risk capital burdens when it finally thudded onto their desks last week. An accompanying impact study from the Basel Committee showed a 30% average drop in op risk capital for the largest banks under the shift to the new standardised measurement approach (SMA); but as Risk.net reported this week, lenders are dubious about its value, especially given its wildly disparate estimates of the SMA’s impact from bank to bank. Some global systemically important banks could see their op risk capital drop substantially; others could see it more than triple.

In broad strokes, US banks – subject to the Federal Reserve’s more punitive implementation of the current op risk modelling regime – are expected to be the biggest beneficiaries from the shift to the standardised approach. But there is still room in the rules for considerable differences from country to country: for example, national regulators could decide to let their banks ignore some or all of their past loss history when calculating capital, potentially undermining the SMA’s supposed value as an internationally comparable benchmark and turning it into something only slightly less crude than the old Basic Indicator Approach. Regulators could also choose to gold-plate Basel’s minimum standard, as the US has done for many other aspects of the capital framework.

The SMA has not had an easy ride, as Risk.net’s past coverage shows; few people liked the advanced measurement approach, and the BIA and Standardised Approach that complemented it came in for their share of criticism, but the SMA has been widely criticised as a poor replacement. The latest QIS spotlights the extent to which its development has undermined its good points without addressing its bad ones, baking in a lack of forward-looking risk sensitivity and treating outsized losses more harshly.

With the new framework handing significant power to national regulators – something which is understood to be the result of fierce lobbying from certain European legislators – banks will be hoping their supervisors are smiling on them when it comes to balancing the new framework with Pillar 2 add-ons.



Credit Suisse paid $135 million in November to the New York Department of Financial Services for allegedly failing to implement effective controls in its foreign exchange business. According to the regulator, from 2008 to 2015 Credit Suisse traders participated in chat rooms with employees from other banks, where they exchanged customer information to co-ordinate trading and manipulate forex rates to increase the bank’s profits



“We are going to create choice and innovation in the post-trade processing world for derivatives. These two banks are adding to our network rather than replacing any other technology, and like every other part of financial services, we expect multiple providers for processing services” – Zohar Hod, truePTS

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