Kospi losses, Priips and a stable swap market

The week on Risk.net, December 15–21, 2018

7 days montage 201118

Natixis’s €260m hit blamed on big books and Kospi3 product

Rivals say French dealer grew business too quickly – with leveraged version of Korean index one source of pain

Industry lukewarm on proposed ‘quick fixes’ to Priips rules

Many fear performance scenarios will remain misleading and expose providers to mis-selling claims

FX swaps to avoid year-end basis blowout, banks say

Earlier rollovers likely to ensure no repeat of previous cross-currency volatility


COMMENTARY: Perverse incentives

A couple of stories this week highlight the extent to which well-intentioned regulations can go astray. EU regulators have published proposed changes to the packaged retail and insurance-based investment products (Priips) rules on retail investment products, intended to prevent mis-selling by unscrupulous providers using misleading performance predictions. But industry lobbyists now warn that the Priips rules are making matters worse, not better – by insisting providers give three scenarios based on prior performance, they risk causing more mis-selling, not less. The proposed fix could be mandating a risk-neutral performance scenario – but this isn’t popular with the managers of equity funds, who feel it would sell their products short.

Meanwhile, in a change from previous years, this year should avoid the traditional year-end foreign exchange basis blowout, banks sayUS authorities use fourth-quarter data to determine capital charges for its largest banks, so they tend to spend the last few months of the year frantically shrinking their balance sheets, squeezing US dollar funding. This year, though, institutions have been rolling their positions early to avoid the squeeze, and cash and collateral are both more widely available.

The common thread here is not that regulation is pointless – it’s easy to cherry-pick examples of regulations that aren’t working or that are having the opposite effect to that intended. It is that mechanics are always going to have a hard time beating motivations and culture; an institution that desperately wants to defraud its retail customers will find a way, and mechanical measures intended to stop them may well end up backfiring. Major banks will seek to improve their own bottom line at the expense of market volatility and even financial stability, as long as they have no financial or cultural motivation not to.

Regulators since the crisis, especially but not exclusively in the UK, have treated the idea of principles-based regulation as an embarrassing relic, preferring a rules-based approach; it may be time to revisit this decision. The US decision (now reversed) to compel retirement advisers to act in their clients’ fiduciary interest was a step in the right direction, as was the Financial Conduct Authority’s (now abandoned) investigation of the culture of the UK financial sector. Could this be revisited to form the basis for a motivation-based approach to financial regulation that puts changing banking culture at its heart?



The Options Clearing Corporation lopped 36% off its clearing fund requirement in the third quarter, following the introduction of a new methodology for sizing its default resources. Clearing members’ mandatory contributions to the default fund stood at $9.5 billion at end-September, down from $14.8 billion at end-June, and are now at their lowest level since the third quarter of 2017.



“The framework places the responsibility on banks to demonstrate to the bank and publicly their preparedness for resolution, and that they have identified the risks to successful resolution” – Jon Cunliffe, Bank of England

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