Vix panic, op risk models and forex option clearing

The week on, February 3–9, 2018

7 days montage 090218

XIV hedging rule helped protect Credit Suisse

Swiss bank guarded against ETN’s collapse by requiring counterparties to provide hedges in exchange for new units

Op risk modelling to survive move to SMA

Models will still be needed to measure forward-looking risks under Pillar 2

LCH, CME or OTC? Forex traders weigh their options

Bilateral trading costs bite but dealers lukewarm on both firms’ plans for forex options clearing


COMMENTARY: Is op risk modelling saved?

The standardised measurement approach (SMA) for calculating operational risk capital has caused (understandable) alarm for some time. A big problem for many was that SMA, revealed in late 2015 as the planned replacement for all three current approaches, disbarred the use of operational risk models permitted under the current advanced measurement approach. Almost immediately, practitioners started to worry about the future of the models they had spent so long developing – first by seeking to convince regulators to ditch the SMA, or alternatively by keeping them in play in the Pillar 2 process.

The lobby effort failed. Despite a barrage of criticism, the SMA has remained stubbornly in place. But practitioners still insist op risk modelling is now set to survive the move to SMA by moving from Pillar 1 capital calculations to Pillar 2.

So is everything now saved? Not necessarily. SMA, its proponents argued, had the virtue of allowing easy comparison of operational risk between companies – it was derived only from business size and loss history. Internal models sacrificed comparability for accuracy. Whether or not this was true, moving modelling into Pillar 2, under the purview of national regulators, raises the prospect that models will become still less standardised and comparable; in the US, models may have a better chance of survival as part of the Comprehensive Capital Analysis and Review stress test process. Regulators have a good deal more discretion over Pillar 2 than Pillar 1, and taking modelling into Pillar 2 will mean new rulemaking – also likely to reduce comparability and perhaps even force some rejigging of models.

And there’s another problem – the fears over the future of op risk modelling have already had an impact. Reading article after article hinting that modelling could be a dying art (including some, we admit, on has made both banks and practitioners wonder whether it’s worth investing in – this self-fulfilling prophecy has been slowly eroding the skill base of the op risk modelling community, and if there isn’t a clear route to survival this erosion will speed up.



January’s largest loss was a $608 million liability racked up by US Bank for a penalty it expects to pay as a result of an investigation into the bank’s anti-money laundering and Bank Secrecy Act compliance. The investigation by the US Attorney’s Office in Manhattan centres on the bank’s relationship with Scott Tucker, a businessman who ran a $1.2 billion predatory payday loan scheme and was convicted of racketeering on October 13, 2017.



“I think if you listen to any of the soundbites from any US politicians, it’s America first. I don’t think they are worried about any conflicts with international regulation. They are looking after the US-domiciled groups before any others” – UK bank capital markets expert


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