Fire drills, initial margin issues and Libor replacement

The week on, February 1–7, 2020

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Frustrated authorities resort to BCBS 239 ‘fire drills’

ECB and Finma lob impromptu data requests at banks, as BCBS 239 quietly permeates everyday supervision

Custody battle: competing tensions put IM prep in jeopardy

Conflicting custody interests and delayed docs call IM phase five readiness into question

Libor limbo: loan market fallback language upends lenders

Banks seek to replace painful fallback language in loan docs and avoid a cost-of-funds contingency

COMMENTARY: 239 problems

Irritation over slow adoption of the Basel Committee on Banking Supervision’s BCBS 239 standard for effective risk data aggregation and risk reporting is not, unfortunately, a new story – it’s one that has been covering virtually from the standard’s launch. Earlier fears of fines and capital add-ons have been, more or less, fulfilled – though most of the fines imposed for failures to organise risk information have not been explicitly linked to the BCBS 239 requirements.

Compliance has been slow despite the standard’s leisurely pace of implementation, and regulators have been imaginative in response; in the US, BCBS 239 has crept in under the umbrella of the Comprehensive Capital Analysis and Review (CCAR) and now regulators in Europe are trying a new tool – fire drills. Both the European Central Bank and Swiss regulator Finma have been throwing unexpected requests for data at the banks they supervise, often at the most inconvenient times.

The response from banks has been somewhat aggrieved, and with good reason – they’ve complained for some time that the goal of perfect compliance with BCBS 239 is unrealistically soon, hazily defined and constantly moving.

In addition, they say the standard is “enforced in a particularly punitive and irritating way”. One market risk head told “They sent us a lot of data requests under BCBS 239 in the middle of the summer – when they know no-one is there – just to challenge our expertise and our faculty to extract data. They have a long-term plan to keep on challenging us.”

There is a reason for this. Many banks are still embarrassingly bad at record-keeping – and BCBS 239 seems to have turned the spotlight on their failings. Even if the regulation itself has been kept in the shadows, regulatory moves – such as the £28 million fine imposed by the UK Financial Conduct Authority on UBS – highlight the potential for widespread failure to report transactions accurately.

And there is also a very good argument that fire drills are the most realistic way of pushing banks towards the intended goals of BCBS 239. They aren’t just meant to give regulators detailed information to allow them to monitor market activity in normal times; they are meant to give them an insight into whether banks could survive another Lehman event. Urgency and inconvenience are, in this light, the point. BCBS 239 may be an unreachable goal, but regulators are still doing the right thing in stepping up pressure on banks to comply.


A European supervisory benchmarking exercise found 17 out of 48 banks (35%) produced modelled capital requirements in line with benchmarks. Nineteen firms (39%) produced negative deviations, meaning they underestimated own-fund requirements versus the benchmarks. Of these, 16 could justify these deviations, while three could not.



“With the responsibilities we have as a clearing house to close out contracts in a default, it’s difficult from a risk management perspective to see how we could accept new contracts and manage old contracts in a benchmark the regulator had effectively declared non-representative. For that reason, we’re supportive of pre-cessation triggers” – David Horner, LCH, on plans to risk-manage exposures to Libor, in the case of a default following the demise of the benchmark, by hardwiring so-called pre-cessation triggers into its rule book.

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