CCP resolution, margin and Libor’s modelling threat

The week on, September 8-14, 2018

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EU deadlock set to delay CCP resolution rules

Lawmakers disagree over whether Esma should be given new powers to tackle distressed CCPs

Buy side could be biggest voice in key margin decisions

Asset managers encouraged to join Simm’s daily polling mechanism – despite some dealers’ concerns

Libor reform threatens risk modelling under FRTB

Dearth of liquid products and historic data threatens banks with capital hit under new market risk rules


COMMENTARY: Marginalia

Issues around initial margin were all over the news this week – but little of the attention was positive. The standard initial margin model (Simm) introduced in 2016 was intended to provide certainty and common ground for dealers in non-cleared derivatives – exchanging initial margin became compulsory for large dealers in September that year – but it’s proved to be far from the end of the story.

The balance of power could be about to shift – as the margin rules are gradually rolled out to cover more and more market players, the buy side could take a dominant role in the daily running of the margin rules, with as many as a thousand asset managers set to join in, swamping the banks who have taken the lead so far. Some dealers are worried about the possibility of asset managers deliberately lowballing risks to reduce their margin payments. Though the administrators dismiss this concern – claiming it will democratise the calculation, and that the backtesting process would catch any unrealistic submissions – recent experience of benchmark rigging in many financial markets should encourage them to take this possibility seriously.

The impending expansion is also causing worries for dealers in Asia. Even though most will not come under the rules until early 2020, in practice they have very little time left to complete their preparations, delegates at the Asia Risk conference in Singapore heard this week. Regulators will face a huge workload as the institutions they supervise submit their margin models for approval. And many institutions are still unsure which of their peers will actually fall under the rules – which leaves plenty of room for last-minute panic and error.

The Simm itself is also set for an overhaul. The UK’s regulator is taking a hard look at the risks it ignores with an eye to a new capital charge, and also, if its planned amendment goes ahead, higher (albeit more accurate) margin payments. In the face of a cluster of margin breaches this year, JP Morgan’s head of clearing is also starting to question the accuracy of existing margin calculations.

In short, the next 12 months could be make or break for margining – missteps on all these issues at once could leave the entire process discredited and cause considerable damage to the derivatives industry itself.



The largest US banks cut market risk as volatility subsided in the second quarter, with Bank of America dropping its market risk-weighted assets (RWAs) by $8 billion, or 13%, over the period. Total market RWAs across the eight US global systemically important banks fell $31 billion, or 6.7%, quarter-on-quarter.



“Any issues may just go away by the time the FRTB is live, unless any Libor products survive – those would be the ones with the issues since they would have no transactions” – A risk manager at a US bank

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