Repo, MVA and securitisation

REPO basis blowout hits JP Morgan interbank clients

MVA forces dealers to term-fund initial margin when volumes climb

SECURITISATION losses rattle peer-to-peer lenders

COMMENTARY: Clarity is key

In markets, lack of clarity in regulation is a perpetual concern. This was evident during the past week when it came to developments related to the Fundamental review of the trading book (FRTB), non-cleared swaps and derivatives bail-in.

A key test in the Basel Committee's FRTB is still being debated by regulators, six months after the new capital rules were finalised. The debate centres on the profit-and-loss attribution test, which helps deteremine whether banks can model their own capital requirements or face a tougher standardised capital treatment. Banks argue valuation adjustments should be left out of the model approval process, fearing the test will be harder to pass if the add-ons are included. They say further studies should be undertaken before a decision is made – but that could delay attempts to clearly define the test.

Elsewhere, a lack of clarity around the US Commodity Futures Trading Commission's floor trader exemption is reported to be stopping non-banks from acting as swap market-makers. The exemption allows principal trading firms to act as market-makers in the cleared, electronically traded interbank swap market without having to register as a swap dealer, but it's uncertain whether this carve-out applies to bilateral, non-cleared trades. Non-banks complain the agency is discouraging competition and needs to modify the rule.

In Hong Kong, questions are being raised over derivatives bail-in, with banks seeking specific guidance from the Hong Kong Monetary Authority (HKMA). The regulator is seeking to enforce total loss-absorbing capacity (TLAC) requirements from the Financial Stability Board (FSB), which state that capital and other subordinated debt instruments are most likely to be subject to write-downs or conversion. Derivatives liabilities, which can raise challenges in terms of valuation, do not satisfy the FSB's standards as eligible instruments for meeting minimum TLAC requirements. But the HKMA has added a caveat that it "should have sufficient flexibility to manage an institution's failure", which would give it the power to bail-in derivatives liabilities.

STAT OF THE WEEK

The DTCC's interbank general collateral finance repo service was formally suspended at the end of the day on Friday, July 15. On Monday, JP Morgan clients paid 3–5 basis points more for cleared repos than those of BNY Mellon. The difference blew out to 20–30bp on Tuesday, before narrowing to 11bp on Wednesday, several market sources say.

QUOTE OF THE WEEK

"The securitisation market relies on a great deal of trust that everyone who is responsible is doing their job. Unfortunately, I don't think you can make that statement [anymore]", Gyan Sinha, founder of New Jersey-based Godolphin Capital Management

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