UK RPI, initial margin and Brexit data problems

The week on, March 16–22, 2019

7 days montage 220319

Once bitten, twice shy: UK traders wary of inflation reform

Proposals to fix RPI methodology flaws are back on the agenda, but traders have been caught out before

Dealers seek clarity on buy-side IM relief

Hundreds of buy-side firms may still need to calculate margin and get models approved

Brexit to deliver further blow to Mifid transparency data

Market participants say duplicate reports in UK and EU will result in misleading public data


COMMENTARY: Back to inflation

The UK’s flawed retail price index (RPI) inflation measure has come up again this week – it’s overdue for reform, but, if anything, there seem to be more obstacles in the way than there were this time last year.

RPI has been under fire for several years. The UK Office of National Statistics dropped it as far back as 2013 because its underlying arithmetic is questionable – the preferred measure is now either the Consumer Price Index (CPI) or an amended version of CPI that includes housing costs, known as CPI-H. But much of the UK pension industry still depends on RPI linkers to match RPI-linked liabilities. As a result, RPI gilts continue to be issued, and the CPI market – and the market for CPI/RPI swaps – remains very quiet.

The market is also cautious because it was wrongfooted in 2012, when a previous consultation ended up keeping RPI as it was – rather than trying to reform the index. Any reform would also hit the value of existing RPI linkers by lowering the index (bringing it closer to CPI).

But, as Mark Carney told the UK parliament last year, these problems are not going to solve themselves; there will always be a short-term argument for the Debt Management Office (DMO) continuing to issue RPI linkers, rather than trying to jumpstart an illiquid CPI market, risking fragmentation and leaving pension funds starved of the assets they want.

The DMO needs to bite the bullet and produce a firm commitment to issue CPI linkers, in significant quantities, on a timetable announced in advance. With adequate notice and a reasonable level of certainty, the UK gilt market should be able to make the transition smoothly, and markets can be developed in the derivatives needed to manage RPI/CPI basis risk. The alternative is to continue kicking the can down the road – storing up trouble for the future by continuing to rely on a discredited index. The DMO and the Treasury should do better than this.



Banks are currently €36.1 billion short of the capital they need to comply with the fully loaded Basel III requirements that will take effect in 2027, data from the Basel Committee shows. Group 1 banks – internationally active firms with more than €3 billion ($3.4 billion) in Tier 1 capital – need to raise €30.2 billion in aggregate to meet their end-state capital targets. The 29 global systemically important banks account for €29.3 billion of this shortfall.



“Trading book activities are global and market risk capital should be diversified across country borders, so the more harmonised FRTB [is], the more efficient the global financial market” – Ryozo Himino, Financial Services Agency

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