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After bruising EU model review, banks ask: ‘Why bother?’
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Quotes
You’ll find all sorts of things happening in prime risk management, from sophisticated to not. Exposure in prime businesses is not appropriately remunerated. As the Credit Suisse fiasco demonstrates, the risks are huge and the leverage completely outsized.
Former head of one Wall Street prime brokerage
The models are saying ‘release, release, release’, as we get out of the crisis; 'given a good economic environment, we should be reducing reserves.’ But nobody’s comfortable with that, given that there’s still a lot of uncertainty in the economic environment.
Senior credit risk executive at a large US regional bank
Some critics have continued to argue that CCPs’ initial margin increases had negative knock-on effects in other parts of the financial system. These critiques persist despite the lack of supporting evidence.
CME Group publishes research rebutting accusations that its margins are procyclical
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Big Figure
Disclosure deficiencies
By using swaps, Archegos was able to avoid the Securities and Exchange Commission’s disclosure rules, which require investors to report their holdings if they acquire more than 5% of a company’s shares. Those rules did not apply to Archegos because it amassed its stakes using derivatives, rather than purchasing the shares directly. That allowed the fund to keep its positions largely hidden, even from its prime brokers, who seemed to be caught off guard by the scale of Archegos’s holdings when it defaulted. To understand how large and concentrated Archegos’s positions were, Risk.net has analysed the regulatory disclosures of its six main prime brokers, which bought the stocks as hedges against the derivatives trades. The banks’ 13F filings show their holdings of eight core stocks linked to Archegos increased from $3.8 billion at the end of the first quarter of 2020 to $7.4 billion on June 30. By year-end, this had jumped to $26.4 billion.
Read the full articleRisk Management
After bruising EU model review, banks ask: ‘Why bother?’
Post-Trim changes erode capital savings from internal models while raising their running costs
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