RBS, dividend curves and system failures

The week on Risk.net, March 28–April 3, 2020


RBS exits listed derivatives trading and clearing

Clients served eviction notices last week as bank moves to downsize NatWest Markets unit

Sluggish back-office systems added to margin pressures

Systems supplied by FIS struggled to handle massive spike in March trading volumes

Hedge funds see big gains on dividend curve trades

A popular relative value strategy delivered unexpected profits when companies axed payouts


COMMENTARY: The limits of imagination

Back in 2007, Goldman Sachs’s hapless CFO David Viniar received a good deal of unwelcome attention for describing the credit crunch as a “25-sigma event” – a statement he later amplified by saying that “we were seeing things that were 25-standard deviation events, several days in a row”. A 25-sigma day should, in theory, come along once per universe. Now, just over a decade later, the far reaches of the risk tail are being explored again, with MSCI warning that returns on leverage in its global model are down by 14 standard deviations. It seems that in finance, as on Terry Pratchett’s Discworld, million-to-one chances turn up roughly nine times out of ten.

It isn’t just risk and return models that are being stretched. Eric Yuan, the chief executive of the teleconferencing company Zoom, who must be experiencing a unique mix of euphoria and agonising stress right now, posted defensively this week that “our platform was built primarily for enterprise customers – large institutions with full IT support … we did not design the product with the foresight that, in a matter of weeks, every person in the world would suddenly be working, studying, and socialising from home”.

IT systems for the trading world are also struggling: sluggish back-office systems from specialist provider FIS slowed to a crawl as markets seesawed, producing unexpected strain on brokers whose clients didn’t receive margin statements in time.

Quants are already asking what they can learn from the Covid crisis, as Alex Lipton and Marcos López de Prado described in a new manifesto on Risk.net this week. Their colleagues need to ask the same – credit models under strain are being supplemented with increased scenario analysis, as Risk.net reported last week, but this will be pointless unless risk managers exert themselves to ensure the scenarios go far outside the comfort zone.

All too often scenarios are constructed backwards – not picking a likely severe scenario and asking “could we survive”, but asking “what could we survive” and using that as the extreme. The last few decades have shown that system-threatening crises, at a national or global scale, can be expected roughly once a decade – 1987, 1997, 2008 and 2020.

There’s no longer an excuse for planning any part of the fragile financial system without taking this into account. Companies worried about the expense of crisis-proofing should consider that their investment will inevitably end up looking laudably farsighted – and they won’t have to wait more than a decade or so for it to pay off.



The top US banks have yet to cancel dividend payouts. If they do, they could hold on to around $27 billion of earnings to shore up their capital positions – a dividend freeze for the whole of 2020 could release an amount equivalent to about 3% of aggregate Common Equity Tier 1 capital held as of end-2019. US banks stand apart as top lenders cancel dividends



“Almost all accounting rules are procyclical because the world is cyclical and accounts should reflect reality” – Jesper Berg, Danish Financial Supervisory Authority

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