Operational risk, LCR and XVA

The week on Risk.net, February 26 – March 3, 2016

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VENDOR RISK oversight proves a problem for banks

LCR options-based solutions attract attention

XVA push reflects importance of valuation adjustments

 

COMMENTARY: Opacity risk

The importance of transparency was highlighted this week – particularly in the complex, uncertain and highly dangerous area of operational risk management.

Regulators have started pushing central counterparties (CCPs) to do a better job of sharing information on cyber risk – an attempt to co-operate in tackling a shared threat. It appears there is some work to do, with market participants this week claiming CCPs are loath to report cyber attacks against them.

Banks are also being pressed to scrutinise their vendors and service providers more effectively, following a series of high-profile losses that resulted from third-party failures – last year's outages at SunGard and Bloomberg are two examples. The banking industry is struggling to comply – in some cases cutting vendor numbers or hiring more staff to oversee third-party relationships, and even ‘fourth-party' relationships with subcontractors. Experts have also recently criticised the insurance industry's approach to outsourcing risk calling it simplistic and poorly planned.

Vendor risk was identified as one of the top 10 operational risks for 2016 by Risk.net earlier this year, and some practitioners argue it deserves to be treated as a separate operational risk category.

 

QUOTE OF THE WEEK

"I was never one of the people who believed that the OTC business was going to go away. At the end of the day, there are a lot of needs that corporate clients have for non-standard transactions, which just don't translate into what futures markets can provide" – Jim Koppel, head of commodities for the Americas, Societe Generale Corporate & Investment Banking.

 

STAT OF THE WEEK

Net returns for hedge funds in commodities were –7.24% in 2015, and there were a record 17 liquidations of commodity hedge funds

 

ALSO THIS WEEK

Freddie Mac reviews $600bn hedge book as losses mount
Swap spread inversion contributed to derivatives losses of $2.7 billion in 2015

Giving the Omega ratio a new lease of life
Johnson-Omega could change the way financial firms measure portfolio performance

Accounting puts brake on move to daily settled swaps
New margin approach threatens hedge accounting status, could hurt effectiveness

Benchmark providers eye banks' prop index disposals
Stricter oversight could see index houses gobble up dealers' in-house indexing units

Buy-siders hope for late reprieve on margining for non-cleared swaps
National supervisors coming round to industry view on same-day settlement, say sources

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