Fast VAR, CDS margins and Citi’s return to FX prime

The week on, May 4–10, 2019

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Born again: Citi’s forex prime brokerage

After a $180 million gut-punch, the apex brokerage is now evangelising to amused rivals about the perils of mispricing

Quants propose new method of calculating op risk VAR

So-called ‘incremental value-at-risk’ offers future snapshot of op risk exposure, authors say

SEC may allow wider cross-margining of single-name CDS

Banks want to cross-margin single-name CDS against options, indexes and cash products


COMMENTARY: Lessons learned

When the GTEC Pandion Multi-Strategy Fund, a hedge fund following a risky strategy involving exotic options on the Turkish lira, got blindsided by the latest swings in that infamously volatile currency in 2018, it ended up deeply out of the money – and unable to meet a massive margin call from its broker, Citi. The failure in turn left Citi’s forex prime brokerage (FXPB) division far into the red, with a reported $180 million loss.

Heads, unsurprisingly, rolled. But now Citi FXBP is back, with a white paper calling for its peers to change their ways: underpricing risk is dangerous and shortsighted, the bank says, and prices will have to rise across the industry, especially in light of new regulations.

It’s pointless trying to resist the temptation to mutter “Well, he would say that, wouldn’t he” – Citi’s losses were preceded by a number of classic warning signs, including a near-miss of a very similar loss in 2015, rapid growth, the offering of credit to otherwise ineligible customers, and a close link between the ambitious FX desk and FXPB. And no doubt many of the same problems exist at its competitors.

But it is also worth remembering that, at a systemic level, this is a success story, and the sign of a well-functioning market. Citi, as its fall approached in 2018, was dominating the forex prime brokerage market. It took heavy losses when its risk-hungry strategy came back to bite it, but it did not collapse, and is now back in the business (albeit reformed and chastened), and no other prime brokers suffered systemic effects.

The incident was painful for Citi, no doubt, but it was not the sign of a market that needs collective reform; Citi took risks, it knew it was taking them, and the outcome was against it. Inevitably, in a highly competitive market in which risk pricing is opaque, there will be a temptation to shade margins downwards in order to win business; the result will be periodic losses. But regulatory reforms, if they increase the cost of trading – as Citi predicts – could exacerbate this problem, as businesses come under pressure to keep their margins up.



A Russian bank is responsible for April’s largest publicly reported operational risk loss. Suspected fraud at Yugra Bank has resulted in the arrest of majority shareholder, Alexey Khotin, according to the Investigative Committee of Russia. Authorities are probing the embezzlement of 7.5 billion rubles ($117 million)



“We do not allow the technology to override human decisions. Eventually, the decision is made on the investment committee level. So, you could think about the artificial intelligence as an additional member of the committee. After all, we still need humans to bring in creativity to design the strategy from scratch” – Or Hiltch, Skyline AI

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