Orca, Euribor and SoftBank CDS

The week on Risk.net, June 22-28, 2019

7 days montage 280619

UBS unleashes Orca for rates clients

Machine learning algo trawls liquidity pools to slash US Treasury trading costs

Lingering Euribor may hit €STR futures prospects

Bourses question viability of euro RFR contracts, as Euribor reform efforts remove transition incentives

CVA, debt raising said to drive SoftBank CDS trading

Volumes rise as tech giant’s debt spree forces banks to hedge their counterparty exposure


COMMENTARY: Temporary disruptions

Policy makers and investors in every financial bubble think “this time is different.” Widely – and rightly – mocked in the aftermath of the financial crisis, it’s a bold person who says it sincerely today. But this week Risk.net looks at various areas where technological disruption could mean that the rules really have changed significantly.

Asset managers are finding that value investing strategies are no longer producing the returns they once did. Digital disruptors such as Amazon, Netflix and Uber have relegated a class of established companies to being cheap not because of temporarily being unfashionable (and therefore ripe for buying before they rise again) – but because they are dying.

Elsewhere, there are other potential game-changers. UBS has rolled out its Orca execution algorithm for the rates market, promising dramatic cuts in hedging costs for its customers. Japanese tech conglomerate SoftBank – which holds stakes in virtually any headline technology company you care to mention, as well as running the $100 billion Vision venture capital fund – is driving a boom in credit default swaps in a normally staid Japanese market. And the Bank of England is looking closer at liquidity risks as the stability of retail deposit funding shifts.

Question for the reader: which of these disruptions are temporary, and which represent permanent shifts in the way the financial sector works?

The new breed of web companies have been disrupting industries for decades now – online commerce, social media, video streaming and novel applications of mobile technology have made billions. But industries have been disrupted before. As one of the speakers at this week’s Risk Live event in London noted, only 60 of the 1,955 S&P 500 companies are still in the index; present are Boeing and Proctor & Gamble, but no Studebaker or Brown Shoe Company. And the average lifespan of an index constituent – before it fails, is taken over, or drops out of the index again – has fallen from 33 years in the 1960s to 14 years.

Orca promises welcome cuts in costs to its rates customers – and no doubt UBS’s competitors are hastening to build their own equivalents. Once the dust settles, the most likely result will be lower margins across the board, and fewer venues still operating – with regulators worrying about another new technological risk.

The shift to using market-implied counterparty risk measures in calculating credit valuation adjustments has hit the bottom line at the major Japanese banks. SoftBank, as the counterparty whale in the Japanese CDS market, is just part of this effect. But it doesn’t represent a fundamental shift – rather it’s the country’s banking sector coming into line with most of the rest of the world.

But the Bank of England is preparing to deal with what could be a real and secular shift: the blurring of lines between tech and finance.

It’s been a truism for many years now that major banks are among the largest tech companies in the world; Goldman Sachs hires more coders each year than Facebook and Google together. But the process works the other way too. Facebook’s planned launch of its own currency shows how tech companies could move into bank territory. And through services such as WeChat and Alipay, Chinese tech giants have taken retail payment processing for their own.

In light of the popularity of digital banking, the Bank of England’s decision to focus on liquidity reflects that this shift could happen very quickly elsewhere as well.



Fire sales of assets by stressed banks could be more important than the structure of banking networks in spreading a systemic crisis, a new simulation shows. Asset price drops are not transmitted through the existing interbank financing network, but instead affect every bank simultaneously. As a result, the simulation finds they could cause the failure of up to 17 times as many banks as would be brought down by interbank defaults alone.



“Can you imagine what effort we will have in the risk division when we start to validate – and in part we already do – all these artificial intelligence and machine learning algorithms, with all that voodoo introduced in those models, where people calibrate a learning rate based on experience, instead of scientific evidence?” - UBS chief risk officer Christian Bluhm.

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