Mifid swaps, VAR and buy-side Covid lessons

The week on Risk.net, July 25–31, 2020

7 days montage 310720

Before and after the Covid-19 storm: buy-side risk survey

Wide-ranging survey reveals what worked and what didn’t in March – and what will change as a result

Why investors are stuck with flawed VAR models

Buy-side risk survey: VAR wasn’t much use in March, but it is ingrained in the industry

Transparency vs clarity: the Mifid swaps conundrum

Participants want better OTC transparency, but say Esma’s efforts at clarity could muddy the picture

COMMENTARY: VAR from ideal

VAR is going nowhere – but, before the gloom sets in, there’s evidence that understanding of its shortcomings and limitations is now more widespread than ever. Risk.net surveyed buy-side risk managers around the world on their reactions to the pandemic and the market turbulence it caused – and asked them how they planned to change the way they did business.

The results make interesting reading. VAR’s value as a single, easily understandable measure of risk outweighs any problems it has, in the eyes of a majority of risk managers. The biggest changes in sentiment appear to be a growing appreciation of liquidity risk – now ahead of operational risk in the collective ranking of threats – a drive to overhaul the contents of risk reports to make them more useful, and a new determination to step-up scenario analysis.

All three of these conclusions need to be treated with a degree of caution. The full extent of operational risk losses as a result of the pandemic is yet to be seen. Regulators have been holding back from imposing large penalties – total operational risk losses actually halved in the first half of 2020, compared with the previous year. And misconduct taking advantage of the disruption around lockdown may not be detected for months yet. Also, the pandemic is far from over, with cases and deaths beginning to rise again in many European countries, and continuing to climb in the US.

Similarly, changing the contents of risk reports will only work if it means more relevant information getting to more people – those documents need to be read and absorbed. And here, in fact, the third likely change might be important. There is still a wide range of practice on scenario testing; buy-side risk managers that test daily or weekly were aghast to learn that some of their peers may only test once a year. Raising the frequency here will not only produce more up-to-date information on exposures to extreme scenarios, it will also keep tail risks in the spotlight, and perhaps produce an improvement in risk mindset that will survive once the pandemic is past.


Issuance of floating rate notes linked to US dollar Libor in Asia has soared from $10 billion in the first quarter of 2019 to $26 billion in the same period this year. Volumes only tailed off as the coronavirus pandemic extended its grip across financial markets. With regulators urging banks and other participants to wean themselves off Libor, concerns are growing that Asia is lagging in its transition efforts



“The system had a liquidity issue: some two-year investment-grade bonds traded down 10-15% in a period of days – that’s the type of dislocation you got” – Sudi Mariappa, Pimco

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