SOFR discounting, Covid and scenario crowdsourcing

The week on, September 12–18, 2020

7 days montage 18092020

SOFR discounting: CCPs prepare for make or break auctions

Deluge of one-way risk and kinks in basis swap auctions could derail Libor transition milestone

Covid scenarios, pt II: apocalypse how?

Second crowd-sourced scenario exercise reveals polarised views in equities and FX

Bank resolvability in the time of Covid

We will balance flexibility and resilience, says director of EU’s Single Resolution Board

COMMENTARY: The new worst cases

There’s a striking chart in’s summary of its second scenario crowdsourcing exercise: it shows the survey pool’s first attempts to forecast the future movement of the S&P 500 back in March, their second attempts in the more recent exercise, and the actual course of the index so far. And though the index itself recovered smoothly back to its pre-pandemic peak, the uncertainty around its future movements is actually higher now than it was in late March, when the forecasters were looking at explosive growth in the pandemic and a slumping index.

What’s going on?

There are two broad answers: either uncertainty about future economic scenarios actually is greater now than in March; or it was always this big and the survey pool is now starting to recognise that. Since it is not possible to ‘rerun’ 2020 a few thousand times to get an accurate idea of the distribution of possible outcomes (the idea of rerunning 2020 even once is fairly horrifying), it’s impossible to tell which one is right.

Evan Sekeris, formerly of the Federal Reserve, argues that the wider bounds reflect an actual increase in uncertainty. He says: “We face not just an uncertain future, but one in which we could be looking at states of the world, in the next few months, that are unimaginable.” And there’s definitely a sense in which this is true: in late March, an economically disastrous pandemic was already locked in, while in late June the recovery looked far more uncertain. Would there be one? How fast? Would there be a second wave, when, and how large?

But it’s also plausible that extreme scenarios are more imaginable now, because the world has been through one – and, just as a major loss event shakes up banks’ stressed value-at-risk calculations, it will also change forecasters’ instinctive sense of what is plausible. In which case, they should cling on to this moment, and remember it once times are calm again.

It is perfectly conceivable that, in the next decade, the world will have to deal with another pandemic of equal size to Covid-19. There have been three in the last hundred years – the 1918 flu and the HIV pandemic are the others. What does this tell you about the expected probability of a fourth by 2030?

Another coronavirus, a novel influenza virus, or an extremely drug-resistant tuberculosis strain are all entirely plausible pathogens. And there are other tail event categories. A nuclear exchange between the US and North Korea in 2017, according to then-US defence secretary James Mattis, was a real and frightening possibility; and the potential damage of climate-change-induced disasters grows greater by the year. Dropping the habit, acquired at such cost, of considering truly extreme scenarios would be a foolish move.


Insurance firms in the European Union saw €352.2 billion ($416.8 billion) wiped from their fund assets over the first three months of 2020, data from the European Insurance and Occupational Pensions Authority shows. Total assets identified as collective investment undertakings, the regulatory term for funds, made up €3.38 trillion (31%) of insurers’ total asset portfolios as of Q1 2020, down more than 9% on Q4 2019.



“It was pretty uncomfortable, because it laid bare what they were doing. [It] wasn’t horrendous, but I just said, ‘that is not what we would expect from you’. Once they realised we were watching and we were showing them this, their data improved rapidly” – Carl James, Pictet, on comparing dealers’ indicative prices to actually traded prices

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