Brexit novations, ML and the failure of alt risk

The week on, February 16–22, 2019

7 days montage 220219

Brexit novations ‘on hold’ to gain reg relief

Conditional relief would subject early swaps movers to clearing and margin rules

Machine learning enters battle against financial crime

Standard Chartered and Barclays using artificial intelligence to detect money-laundering violations

Alt risk premia study finds ‘zero alpha’, clear beta to bonds

Vanilla exposures explain as much as two-thirds of returns, authors say


COMMENTARY: Ready for the crime wave

Financial crime is a result of desperation as often as it is a result of greed. Previous recessions have shown that financial crime, in particular internal fraud, tends to climb as the economy contracts – although the phenomenon isn’t immediately apparent, as such frauds tend to take two or three years to be discovered.

Now, the prospect of another recession is growing ever more real. Some major European economies may already have entered recession, economists speculate.

China’s growth appears to be slowing as well, and may be far below official figures. Even the US could be nearing the end of its record-breaking post-crisis growth, and the prospect of multiple trade wars is not helping. In the long years of low rates, returns have not been easy to find. Multiple recent studies, including one this week, have undermined the claims of alt risk strategies to provide a new source of alpha.


As the macro environment worsens and the prospects of new strategies grow dimmer, the temptation will increase to bend the rules – to improve returns by breaking risk limits, to keep customers on board by relaxing onboarding and anti-money laundering precautions, or to abuse private information through insider trading. Machine learning has become the latest tool for risk managers to keep their institutions honest – it will need to be backed up by active risk management, a focus on corporate culture, and strong leadership from the top down if banks are to weather the dangerous period that they will soon enter.



HSBC increased outstanding derivatives notionals by 25% in 2018, with the volume of cleared trades expanding 10 times faster than non-cleared. Gross notionals hit $34 trillion at end-December, up $6.8 trillion from the year before. Of this amount, cleared over-the-counter trades made up $18 trillion, up $6 trillion (51%) from 2017, and bilateral positions totalled $14 trillion, showing an increase of just $605 billion (5%) on a year ago.



“My take on downgrade triggers is that they are of extremely limited usefulness in most cases. Banks jump to default. They can’t go from A-minus to below triple-B-minus and remain a viable financial institution” – Miki Navazio, Seward & Kissel

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