Bank capital, margining and the return of FX

The week on, December 12–18

7 days in 60 seconds 181220

How buy-to-hold accounting shuffle boosts US bank capital

Banks gamble shrinking AFS portfolios will bring down stress capital buffer, G-Sib surcharge

Margin rules snare FX options users

US banks forced to post margin on ‘naked’ trades, with buy-side firms soon to follow

Markets search for FX factor as rates fall flat

Traders signal shift to currency strategies, but is it passing fad or permanent fixture?

COMMENTARY: FX marks the spot

Rates investors have had a tough time over the past year. Interest rates were already at chronic lows following the 2008 financial crisis, before the shock of the coronavirus forced central banks into emergency action once again to prop up enfeebled economies.

With rates at or near – or even below – zero, investors are struggling to find suitable trading opportunities to express a short-term view on the market.

Some have suggested rates products can no longer function as a ‘release valve’ for investors to make trades that relieve pressure from market imbalances. So firms are looking at other asset classes, and foreign exchange is in their sights.

Most asset managers and pension funds use FX for prosaic purposes: mainly to hedge currency exposure within their portfolios. They haven’t, in recent times at least, made much use of the asset class for speculation or to generate alpha.

That appears to be changing. Investors such as Aberdeen Standard Investments and UBS Asset Management are exploring more currency-specific strategies. They see shifts in market fundamentals, such as a weakening US dollar and greater investment in emerging markets, as helping to support these types of trades.

The change won’t happen overnight – and probably won’t suit fast-money investors. But, whisper it quietly, FX could be about to restore some X-factor to investors labouring in a depressed rates environment.


Seesawing equity markets have proved troublesome for trend-following investors. These strategies were down 8% during the Covid crisis in March and April, and continued to fall during the next six months, according to data from PremiaLab. The problem, experts say, is that equities were zigzagging too fast for the algos to catch up. Here’s hoping for a more sedate 2021.


“It is fundamental that in the very next months, benchmark administrators in the EU will be able to regularly publish an €STR forward-looking term structure so that it can be used as a Euribor fallback rate” – Steven Maijoor, Esma, commenting on poor liquidity in €STR derivatives markets

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