Quantum computing, central clearing and the leverage ratio

The week on Risk.net, February 24–March 2, 2018

7 days montage 010318

Quants needed: how finance can use power of quantum tech

New machines have big potential in AI, valuations and VAR, but tech giants like IBM need help from practitioners

European legislators to exempt CCPs from new bank rules

Support in Council and Parliament suggests leverage ratio, NSFR exemptions will be in final text

US clearing banks still push for leverage ratio IM offset

Potential cut in ratio and adoption of SA-CCR not enough to stop shake-out, FCMs warn

 

COMMENTARY: Cutting slack

The pushback against post-crisis financial regulation continued this week, in several different forms. EU legislators moved to exempt central counterparties from incoming bank regulation, specifically the net stable funding ratio (NSFR) and the leverage ratio; the NSFR is unlikely to affect CCPs in any case, but the leverage ratio, if enforced, would have created incentives for CCPs to hold securities rather than cash as collateral – not exactly what regulators would prefer.

In the US, regulators are set for a clash with Congress over a proposed carve-out from the supplementary leverage ratio requirement, to allow banks holding initial margin from customers to offset it against the ratio. The US Federal Reserve (and the Basel Committee, for that matter) are reluctant to authorise any carveout, but Congress is set to act, on the grounds that it’s important not to discourage banks from acting as clearers. The Fed is also backing a Senate bill that would raise the floor for systemically important financial institution (Sifi) status from $50 billion to $250 billion in assets – which will come as a relief to many major institutions that have spent the past few years lobbying hard to escape Sifi status and the regulatory burden that comes with it.

Ensuring the outcome of regulation matches its intention will be an iterative process. But regulation needs to iterate faster. Market and political risks are rising, with a volatility spike on US markets seen earlier this month, inflationary tax cuts, the prospect of a tariff war with China and the unknown consequences of a taper in quantitative easing policies. The worst thing for financial regulatory reform would be to become entangled in that mess – the decks need to be cleared in advance.

 

STAT OF THE WEEK

On January 4, the spot price of natural gas at the Transco Zone 6 New York trading hub hit an all-time record of $175 per million British thermal units (MMBtu), registering a daily average price of $140.06/MMBtu – up 190% from the previous day. Meanwhile, the price of shale gas produced in the Marcellus basin, located in West Virginia, Ohio and Pennsylvania in the northeast of the US, was around $5/MMBtu.

 

QUOTE OF THE WEEK

In the rest of the world, we are seeing clients putting trades on to take Libor risk off their books and replace it with OIS, but we have had nothing like that in Japan – Thomas Reich, Citi

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