VM change, Libor fallback and DTCC blockchain

BAML and Morgan Stanley swaps drop $186 billion on VM change
At least seven banks now using settled-to-market treatment for variation margin

The fraught search for a Libor fallback
Banks and buy side disagree over how to prepare for Libor’s death

The future of risk in 10 interviews: blockchain, Brexit and factor investing
This week we profiled Nex’s Spencer, DTCC’s Bodson, PKA’s CIO and others

COMMENTARY: US exceptionalism on insurers clashes with global view

American isolationism and protectionism, revived under President Donald Trump, is finding a fresh outlet in the insurance sector, as the US reverses its position on designating insurance companies as systemically risky.

US authorities are questioning academics who say insurers are a threat to financial stability, and plan to construct a capital regime outside of global standards.

US prudential regulators have claimed AIG is no longer a threat to financial stability, while the nation’s representatives at the Financial Stability Board have stymied efforts to update a global list of too-big-to-fail insurers. A US Treasury Department report has also argued entity-based evaluations of risk are typically not the right basis on which to regulate the sector.

While this runs against the grain of academic research, the FSB appears minded to back the US Treasury’s position and fundamentally revise its approach to supervising global systemically important insurers (G-Siis).

The International Association of Insurance Supervisors, meanwhile, says it has no plans to ditch the rules it is developing for G-Siis that would include an entities-based approach alongside an activities-based one. The IAIS can claim a solid foundation for its attachment to the entities-based worldview: a measure developed by Nobel prize-winning economist Robert Engle has consistently identified Metlife and Prudential Financial as the most systemically risky US financial firms – ahead of big banks – and Engle believes insurance companies should be regulated as entities. 

Earlier this month, the IAIS put a brave face on discord between the US and the rest of the world by describing a “unified path to convergence” on global insurance capital standards. But behind the scenes, what is dubbed as the Kuala Lumpur agreement on the rules’ implementation is actually being characterised as a “compromise”, since the US process will be independent from the IAIS work and implementation requirements have been watered down.

STAT OF THE WEEK

So-called risk-less compression – the tearing up of offsettable trades without any change in net risk – takes place daily on an industrial scale within clearing houses, accounting for most of the mind-boggling $1.7 quadrillion in notional compressed at LCH’s SwapClear since the start of 2014.

QUOTE OF THE WEEK

“[Funds] are asking, ‘what’s the right strategy for the data, how do you make money with this information?’, not the other way around. It’s a paradigm shift” – Rado Lipus, Neudata