AI, low-capital CFOs and the spread of uncertainty

The week on, February 22–28, 2020

7 days montage 280220

Prising open the black box of AI

Shapley values, Lime and other tools can help decipher machine learning’s output. It’s a start…

Fund securitisation makes capital vanish – and watchdog growl

Probe into possible “abuses” of CFO structure could hit wider investments, experts say

FX options see record volumes as yen goes off-script

Coronavirus outbreak and recession fears triggered frenzied trading in USD/JPY options


COMMENTARY: Storms ahead

FX volatility went away; then it came back. This week, (and its newly launched sister title looked at the reasons for the calm in foreign exchange markets – the longest low-volatility period in memory. Technology, market structure and macro conditions all played their part in answering the question posed by the article: Who killed FX volatility?

Yet perhaps it was too soon to use the word “killed”; this week also looked at the reasons why a normally calm market – USD/JPY – entered a storm of frenzied activity, as bad macroeconomic news and the spread of the coronavirus epidemic undermined yen’s status as a safe harbour.

Worse news has followed – Japan, already on the verge of a recession, announced it would close every school in the country to prevent further spread of the coronavirus, strengthening fears of a downturn (though the yen has since recovered much of the ground it lost).

The situation is particularly noticeable in contrast with events in early January: the US killing of an Iranian general, and Iranian retaliatory attacks on US troops, led to fears of war, but FX markets barely moved – and, indeed, the tensions eased rapidly thereafter.

The recent move may have been exacerbated by significant existing short positions on dealers’ books, but the root of the problem is macroeconomic, hitting equity markets as well, with exchanges in both Europe and the US seeing falls this week. As industrial production is disrupted in China due to the virus, there will be knock-on effects on the financial health of companies dependent on imports from China – or, to put it another way, pretty much all of them.

And to market and credit risk, operational risks can be added. Travel restrictions are already interfering with business travel. Quarantine requirements or illness will produce significant key person risk, while financial pressure could increase the motivation for internal fraud and other forms of financial crime.

All these problems will be worsened by fear caused by uncertainty over the full extent of the epidemic, and fear caused by a lack of faith in the abilities of governments worldwide to deal with it.



JSCC is the only large Asian central counterparty (CCP) to allocate some of its [initial margin and cash default fund contributions]​​​​ collateral to central banks – to the tune of 68%. SGX says it has access to its home central bank, but it doesn’t currently hold any assets there. It’s unclear whether HKEX has access to its central bank or not.


“Regulators don’t have the right to require the administrator to replace the Libor rate with the risk-free rate on the screen. The European Benchmarks Regulation does not allow that” – European bank regulatory expert

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