Covid capital, SA-CCR and problems with post-Libor protocol

The week on, July 4-10, 2020

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US banks want urgent guidance on capital plan updates

Call for Fed to provide Covid scenarios by start of September, not in fourth quarter

SA-CCR adoption may spur wider FX swaps clearing

With up to 90% lower exposures on offer, dealers say capital benefits could outweigh margin costs

Antitrust fears cloud Isda protocol – and fallback spreads

Wait for DoJ assurances could delay Libor transition plans and further unsettle rates trading

COMMENTARY: Is Covid a conduct risk?

The Fed is under pressure to predict the future – not an easy task at any time. This week, reports on the growing clamour from US banks for the central bank to provide the results of its Covid stress tests and a new set of updated scenarios – and quickly, before they become obsolete as the pandemic burns through the US.

It’s still impossible to predict the full extent of the damage – human and financial – that the pandemic will cause in the US. Its impact in other countries has been highly varied, and in a way that few could have predicted in advance.

No-one should have been caught entirely off guard by the outbreak, in late 2019, of a novel and highly infectious respiratory disease. A pandemic of this kind has been top of the UK government’s national strategic risk register for the past 10 years or more. True, it anticipated a novel influenza virus rather than a coronavirus as being most likely – as indeed did in its 2013 Top 10 Operational Risks forecast – but the exact nature of the virus is a secondary issue.

And if an outside observer had been asked to forecast the likely impact of a pandemic in 2020, they would probably have drawn on something like the Global Health Security Index (GHSI) – which, in 2019, ranked the US and the UK as the best and second-best prepared countries in the world, with Sweden close behind. If a pandemic originated in China (where several previous pandemics have begun), they might have concluded, neighbouring countries such as Taiwan, South Korea and Japan, and the poor and unprepared countries of South-east Asia and Africa, would have most to fear.

That has not exactly been the way things have turned out. The 2019 GHSI is now headed for the same bucket as the AAA ratings for so many 2007-vintage structured product tranches. Companies that relied on it are now facing a very different landscape. What went wrong?

A major failing was execution. The GHSI may not have been an inaccurate reflection of national capacity – in previous epidemics, such as the 2014 Ebola outbreak in West Africa, the US response was rapid and well-resourced (as was the UK’s, on a smaller scale). But good capacity only makes for a good outcome if the execution stage doesn’t fail; and the variation in execution quality from nation to nation has been far wider than many would have expected. Delays, mistakes and false assumptions at the highest levels of government have combined to produce vast differences in economic and human impact from one country to another.

That makes Covid-19 something of a conduct risk event, on a national or even international scale. And like conduct risks at an institutional level, it has caused massive losses, remains frustratingly difficult to model, and will dominate the loss history of the world for years to come. Risk managers globally are putting their minds to the problem of modelling and managing conduct risks at their own companies. In the world of Covid, they will need to turn the same attention to the conduct risks embedded in their governments.


Initial margin held by interest rate swaps central counterparties (CCPs) was $271 billion at the end of March, up $51 billion or 23% over the first quarter. At credit default swap CCPs, the total went from $46 billion at end-2019 to $67 billion at the end of March 2020.



“We have identified [a no-deal Brexit] as a systemic risk for a long time, and this is why in September 2018 we granted temporary equivalence, because we thought this was an issue that needed to be addressed. But then at the end of last year, and regrettably, we saw that the risk to financial stability had not been fully removed yet, because we considered the industry had not made sufficient preparations for a no-deal Brexit in case there was one” – Andrea Beltramello, European Commission

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