Ronin, the survival of Libor and synthetic data

The week on Risk.net, April 25-May 1, 2020

7 days montage 010520

The mysterious disappearance of a Chicago trading giant

Puzzling losses, a closely guarded auction and possible redemption – sources unpick Ronin’s collapse

Covid loans support six-month extension for Libor lending

UK working group delays Libor loan end-date to March 2021 as emergency loan scheme shuns Sonia

To model the real world, quants turn to synthetic data

The financial models of the future will be built using artificially generated data


COMMENTARY: The problems of Covid loans

Governments around the world are running up huge levels of debt in order to support people – and businesses – forced into inactivity by the Covid pandemic. Haste is vital – the economic damage and the human cost of mass forced unemployment grow greater every day.

But haste also brings problems. This week, Risk.net looked at a few problematic aspects of the government-backed loan schemes now being rolled out around the world.

Efforts to retire and replace the discredited Libor benchmark are now well into their second decade of life. The UK’s emergency loans represent the latest obstacle to their retirement. Echoing earlier complaints from US banks, UK regulators extended the deadline to stop Libor-linked lending by six months to March 2021. Keeping it in place would have risked interrupting the flow of credit to the struggling UK economy. And the chaos on the financial markets in March has hampered calculation of the planned replacement for sterling Libor, the Sonia term rate.

The loans themselves represent a significant source of operational risk. Rapid market growth is, in itself, a warning sign for conduct risk. If a product starts selling in hugely increased volumes, banks should avoid celebrating and instead look closely for signs that it is being sold to unsuitable customers, or even deceptively mis-sold. The introduction of massive government-backed lending schemes is an externally driven market expansion of unprecedented speed, and carries high mis-selling risk.

Risk.net has already reported on the problems of operational risk and compliance during the pandemic – impaired surveillance, financial pressure and operational stresses will make detecting and responding to conduct risks far more difficult. The risks that Covid loan schemes bring may slip through the resulting gaps in attention.


STAT OF THE WEEK

Societe Generale reported a €326 million ($358 million) loss in the first quarter, with equity trading revenue dropping 99% year-on-year to just €9 million. SG’s structured products book took a €200 million hit as companies held back pre-announced dividends last month – an unprecedented move that structured products issuers, including SG, did not hedge.

 

QUOTE OF THE WEEK

“The scary thing is that our safe havens are not as safe as one would hope, because interest rates are so low, we don’t have anywhere to fall. That’s something I worry about” – Katy Kaminski, AlphaSimplex Group

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