FRTB, Brexit brain drain and problems with RFRs

The week on Risk.net, February 23-March 1, 2019

7 days montage 010319

FRTB 2.0: lower capital but high running costs

Revisions to market risk rules fail to ease complexities of internal models approach

UK quant academics fear Brexit brain drain

Brexit is hitting graduate jobs, funding and “driving European academics away from the UK”, say universities

Swaps market heading for Libor fallbacks clash

Euro market goes own way on question of how to replace term Ibors with overnight RFRs

 

COMMENTARY: The end of movement

Brexit again, I’m afraid. Events are moving fast at the Westminster end of the process – the past few days have seen politicians leaving their parties and rapid shifts by both prime minister Theresa May and the Labour opposition over the way the endgame of Brexit negotiations will play out.

But it’s important not to get too distracted by the political fireworks. As the Financial Conduct Authority’s Andrew Bailey told a House of Lords hearing this week, it is already too late for most UK financial companies to prepare for the worst case – a no-deal Brexit on March 29. Systems and documentation will largely have to continue as before, with the FCA advising companies on which to prioritise – and which failures it will agree to overlook as the transition goes on.

Few would have believed in 2016 that the UK would find itself just four weeks away from the Brexit deadline with still no certainty about the form – or the timing – of its exit from the EU. But it has happened nonetheless, leaving the financial sector with little choice but to prepare for a prompt no-deal Brexit. Good regulator-to-regulator relations mean many of the big issues – central clearing recognition, for example – have already been resolved, at least on a temporary basis. But this week, Risk.net looks at a lower-profile but potentially highly damaging aspect of a UK exit from the European Union – the potential for a Brexit brain drain.

UK quant finance academics are already finding that Brexit is hurting the job prospects of their graduates and restricting their ability to recruit and retain teaching staff from the rest of the EU – this will only worsen, they fear, once the UK leaves the EU.

While recent votes in Parliament may end up safeguarding the rights of EU citizens to keep living in the UK, one of the main drivers for the Brexit vote, and a top priority for the PM, is to end freedom of movement and drastically cut immigration to the UK. It’s hard to see this being changed in any possible Brexit deal – inevitably, it will be harder for EU citizens to come to the UK to work and study, and for UK citizens to do the same in the EU. That is in fact the whole point of Brexit for many of its supporters.

The effects of this change will not be immediately obvious, but they will still be very harmful for the UK’s financial sector, and for foreign banks in the UK.

Why would an ambitious EU student choose to study finance in London or York when their job prospects in the country after graduation will be uncertain, fearing they will be seen by their host nation as a temporary and rather unwelcome guest? Why would they, 10 years later, push to be promoted to head their bank’s London office, anticipating convoluted residence paperwork and placing their spouse and children in a hostile environment? And why, 10 years after that, as a senior decision-maker, would they push to expand that London operation, rather than opening the new business somewhere more welcoming?

 

STAT OF THE WEEK

Administrative charges soared by 46% to $2.9 billion at Standard Chartered in 2018, as the bank prepared to pay fines related to past misconduct. The bank put aside $900 million last year to cover penalties related to investigations into transactions violating US sanctions against Iran and improper conduct in foreign exchange trading, and a charge levied by the UK conduct watchdog for financial crime control failures.

 

QUOTE OF THE WEEK

“I thought [probabilistic theory in mean field games] was a wonderful way for mathematicians to try and understand the behaviour of large crowds: pedestrians, birds flocking, or herds of traders trying to get into a congested trade. I believe there are an enormous number of possible applications. Mathematicians have neglected game theory. John Nash got a Nobel Prize, but he got it in economics, before being recognised by mathematicians. Game theory has basically been handed over to economists, who teach it – very few maths departments do” – René Carmona, Princeton University

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