Hedge fund losses, CLS and a capital floor

The week on Risk.net, December 5–11


How hedge funds lost big on US dollar Libor delay

Sharp narrowing of fallback spreads may have caused up to $2 billion of losses

CLS: can’t live with ’em, can’t live without ’em?

FX settlement giant not fast on its feet, say dealers and challengers, but hard to knock down

Parallel lines: EU begins fight over Basel output floor

Leaked plan to exclude buffers from floor would please EU banks, could anger Basel and US

COMMENTARY: Sting in the tail (risk)

Fat tail risk – and the peril of ignoring it – was brought to a wider audience following the financial crisis of 2008, when asset prices plummeted beyond the levels that most models had foreseen. The statistical concept describes a distribution showing an outsized exposure to extreme events. In other words, when the unexpected hits, it’s going to hurt.

The term has relevance to climate change and its financial risks. Scientists predict a range of consequences from a rise in global temperatures, with a broad consensus that an increase of more than two degrees Celsius above pre-industrial levels will cause widespread and possibly irreversible damage to the planet.

The dangers of such an extreme, but plausible, scenario was one of the key messages from a November report by an influential group of finance ministers and central bankers. The Financial Stability Board report warned institutions to expect “considerable tail risk” from physical climate change. It also highlighted the amplifying effect of risk cascading through the financial system: banks that have prepared well for climate change may suffer terminal damage from other, less well prepared peers. Infection can spread fast through a closely connected network, as recent months have taught us.

In response to the report, the Institute of International Finance, a trade body for the world’s leading banks and financial firms, is calling for a clearer “roadmap” of action. It wants to see greater co-ordination of the work that governments, central banks and global standard-setters are carrying out, to help ensure all parties are pulling in the same direction.

And what better organisation than the FSB to perform such a role, observers suggest. Its members’ position at the heart of global policy-making puts the body in prime position to co-ordinate efforts on climate risk.

Yet, the FSB’s report contains little in the way of concrete proposals or guidance. Instead the body proposes to spend the next 12 months analysing data on climate change so it can better measure the risks involved. A worthy pursuit, yes; but not the bold initiative that some had expected.

Roman emperor Nero is said – unfairly perhaps – to have fiddled while Rome burned. No-one is suggesting the FSB is guilty of the same level of dereliction. But the financial industry may have hoped for something other than number-crunching while the planet heats up.


Deutsche Bank’s project to wind down its bad bank is not progressing as smoothly as the German lender had hoped. Earlier this month, the bank told investors that the leverage exposure of the toxic asset-holding unit would be €51 billion ($62 billion) by the end of 2022. As recently as October 2019, the bank had planned for the unit’s leverage exposure to have just €9 billion of leverage exposure by end-2022.


“It is possible down the road that there could be dollar synthetic Libor; it’s also possible there could not be. No-one should assume that there will be” – David Bowman, Federal Reserve Board

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