Risk magazine - Jun 2020
In this issue: using the Bachelier model for oil options pricing; mental health fears around lockdown life; a new scenario-testing method; and much more
Articles in this issue
A positive response to negative oil prices
Overhauling pricing models could reap rewards even if prices don’t cross zero again
Markit plans SOFR credit spread add-on using CDS data
Vendor taps vast pool of credit market data to create new benchmark “not dissimilar” to Libor
Pressure grows on structured products as losses mount
Dividend-related losses at BNP Paribas may be higher than previously reported
Swaptions compensation method divides market
US and European firms back redress payments, but disagree over how they would work
UK regulator rules out extending Libor deadline
Despite Covid disorder, FCA will not compel banks to submit Libor quotes after 2021
SOFR phase-in for cash products sparks ‘mismatch’ fears
Official proposal for one-year transition period could lead to basis risk, participants say
US loan market will move to SOFR by Q1 of 2021 – Wells Fargo
Libor head predicts quick transition for loans following ‘big bang’ shifts in swaps
CCPs failing to set effective margin limits – study
Clearers must strike balance between countercyclicality and sensitivity to risk
Two quants use options pricing tools to model Covid-19
New tool aims to gauge wider cost of virus control measures
Negative Vix premium signals vol spikes, research finds
Unusual pattern seen in Covid crash could help volatility sellers avoid future reversals
EBA relaxes modellability hurdles for market risk capital
Flexibility granted for assessing NMRFs on options, but constraints remain on committed quotes
Ronin expanded rapidly before flaming out, accounts show
Chicago prop firm tapped $450m financing line with broker-dealer as assets grew to $34bn
European lawmakers urged to prevent CCP contagion risk
Watchdog says carve-out needed in new recovery and resolution rules to avoid cascading default of clearing houses
A zombie US capital ratio comes back to life
SLR rollback could mark the return of 1990s Tier 1 leverage ratio as a binding constraint
People moves: HKEX’s Charles Li to leave, new Isda directors, and more
Latest job changes across the industry
Bachelier – a strange new world for oil options
Model tuned to negative prices has implications for pricing, margining and delta hedging
Structured products are lost in translation post-Libor
Benchmark shift would “fundamentally transform” popular rates structures, users fear
Scrutiny and frictions follow EMS vendors into fixed income
Aggregators are facing resistance from venues and attracting the attention of regulators
BLTs and glitchy Wi-Fi: lockdown life for FX execs
With traders transacting trillions from their living rooms, currency markets are adapting to new normal
Covid scenarios: finding the worst worst-case
As pandemic trashes historical data, a Risk.net tie-up with Ron Dembo’s new outfit tests promise of polling
Mental health: the new frontline for risk management
Rise in stress and anxiety among locked-down staff could open up banks to range of risks
Count them in? Big US banks mull PCAF carbon standard
BofA, Citi and Wells Fargo looking to adopt emissions standard popular with EU lenders
Spot FX shies away from regulatory yoke
As Europe weighs Aussie-style rules for spot trading, some see benefits – but many fear the burden
Leverage ratio squeeze hits options trades
With clearing banks constrained by leverage limits, prop traders fear options market lockdown
CSDR buy-ins – next on the regulatory chopping block?
A big jump in trade fails is adding to doubts about the EU’s settlement discipline regime
Rewards for failure: the ECB’s topsy-turvy market risk relief
Eurozone banks with better models are least able to offset Covid-driven rise in backtesting multiplier
Collateral must be part of monetary policy equation
Incorporating collateral efficiency into IS-LM model reveals side-effects of QE
Alt risk premia chasing 'tail beta' – again
Quant strategies that failed in the coronavirus crash face a reckoning
Investors trade the drama out of the crisis
How LGIM, Axa IM, Manulife and other buy-siders tackled the toughest markets since 2008
Simm may come with a side benefit – a common data standard
Buy-side firms using Acadiasoft for Simm calculations must adopt the ORE XML data format
Margin calls on eurozone funds rose fivefold in March
ECB data shows some funds faced liquidity squeeze as VM calls flooded in
Counterparty risk capital charges up 20% at top UK banks
StanChart CCR capital requirement jumps 41% over the first quarter
Systemic riskiness of top US banks increased in Q1
JP Morgan’s systemic risk score increased enough to attract a 4% capital surcharge
CIBC’s escape from SA-CCR lowers capital charge
Bank embraces internal model approach for derivatives portfolio
Non-operational deposits flooded US G-Sibs in Q1
JP Morgan also sees a big jump in its maturity mismatch add-on
Corporate loan default risk spiked at US G-Sibs in Q1
Median probability of default increases 17bp to 1.39% on the quarter
Op risk data: IBK snagged in money-laundering ops to Iran
Also: foul play called on Hapoalim’s football bribery scheme. Data by ORX News
Credit data: coronavirus takes toll on corporates
Financials weathered the first phase of the lockdowns, but most other sectors were hit hard
A tale of two (or three, or four) models
Performance measure based on quality of replicating portfolios outperforms ‘P&L explain’, new paper claims
Quantifying model performance
Quality of replicating portfolio is used to measure performance of a model
Two-factor Black-Karasinski pricing kernel
Analytic formulas for bond prices and forward rates are derived by expanding existing rate models
Andreas König’s crisis playbook meets Covid-19
Interview: Trading from home may be odd, but Amundi’s FX head was ready for other stresses