Covid bank tests, swap fix deferred and SOFR switch

The week on, October 17-23, 2020

7 days in 60 seconds 231020

CCP discount switch drives record SOFR swap volumes

Historic move off fed funds discounting leads to trading surge

EU defers legal fix to Brexit swaps trading ban on branches

Efforts to address duplicate Mifir trading obligations stymied by UK-EU negotiations

Covid policy risk hangs over bank stress tests

Banks and regulators are second-guessing the policy response to new outbreaks

COMMENTARY: Lending support

There is one way to be healthy but many ways to be ill. Likewise, Covid-19 has upended normal life in many different ways – as banks are increasingly discovering. 

Lenders are struggling to assess credit risk amid uncertainty over government support for jobs. In banks’ internal stress tests, any assumptions of state intervention will need to be supported by convincing data and analysis. Yet on both sides of the Atlantic, the future direction of policy is far from predictable. 

After growing unrest among businesses affected by the pandemic, the UK this week announced changes to its new taxpayer-funded scheme to protect livelihoods. US lawmakers, meanwhile, are working to agree a further relief package to bolster the economy ahead of the presidential election on November 3. Again, the outlook is hazy.

Politicians are not the only source of heightened risk. US federal regulators are urging banks to ensure they can withstand the increased operational risks from rapid changes in working practices, along with fraud and cyber threats during the pandemic. And not long ago, banks already had to redesign many of their internal controls to support government stimulus programmes.

More changes are yet to come. Next month, the US Federal Reserve will detail its approach to banks’ operational resilience. Outlining the guidance this week, Arthur Lindo, deputy director at the Fed, said banks would be expected to design idiosyncratic stress scenarios and map interdependencies of core business lines and critical operations. 

All this raises the risk of change fatigue. But banks can ill afford it, as it seems constant change is the new normal.   


Amid the coronavirus crisis, non-bank financial institutions tapped credit lines with banks to access the cash they thought they needed to ride out the storm. Banks’ cross-border exposures to the so-called shadow banks fell back slightly over the second quarter to $7.33 trillion globally, down 3% on Q1, but it is still up nearly 8% on end-2019, according to the Bank for International Settlements.



“I think where there isn’t acceptance is when you’re in a daily fund and that’s gated for however long, whether it be months or weeks. I think clients’ expectations would be a daily fund wouldn’t be gated because otherwise it would be a monthly fund or a quarterly fund… Maybe it’s on page 57 of the prospectus and that’s a long way for the client to read, whereas if you say it’s a monthly fund, they understand it’s a monthly fund” – Darrel Yawitch, chief risk officer for Man Group investments, on being clear with clients on crisis liquidity tools.

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