ISDA AGM voices worries on internal modelling rules
SMA means bad news on op risk for Europe
BLOCKCHAIN for CCPs could cut repo liquidity costs
COMMENTARY: Reining in the banks
The derivatives industry met in Japan this week at the annual International Swaps and Derivatives Association general meeting. As Risk.net's team found, the mood was not cheerful – in particular when delegates, including Isda chairman Eric Litvack, started pondering current and future regulatory reforms.
As well as worrying about higher costs, many speakers voiced concerns about regulators' plans to constrain their use of internal capital models. Internal models have already been ruled out by the Basel committee for use around operational risk and credit valuation adjustments (CVA), and severely restricted for loans and other credit exposures. They are also anxious to get more transparency on the model approval process in areas where internal models can still be used.
Since the Basel II capital rules were first proposed, regulators have been working to the same general blueprint – that banks should follow simple and broad capital rules initially, but then (at least the larger and more sophisticated) develop and validate their own more sensitive and accurate capital models, allowing both more economical use of capital and less temptation to game overly broad rules. In a way, it's surprising this vision has lasted so long, especially after a financial crisis where the destructive power was vastly amplified by banks' over-reliance on faulty internal models.
The tide is now turning, but regulators and banks need to remember that the crisis was also an example of disastrous herd behaviour, and a move back to entirely standardised models will make this problem worse rather than curing it.
STAT OF THE WEEK
An industry study challenged the Basel Committee's estimate that its fundamental review of the trading book would only lead to a 40% increase in capital; in fact the increase will be 50% for internal model banks and 140% for standardised approach banks
QUOTE OF THE WEEK
"Several Office of the Chief Economist [OCE] economists identified position limits as an example of a topic on which economic research is no longer permitted. As one OCE economist put it, ‘You can't write a report on something that destroys three years of (CFTC) work'. This issue arose unasked during an interview with an OCE economist. We immediately began asking other OCE economists about the issue. Several other economists confirmed their impression that OCE is now censoring research topics that might conflict with the official positions of the CFTC." – US Office of the Inspector General, reporting on the Commodity Futures Trading Commission
ALSO THIS WEEK
BoJ: unsecured overnight rate top pick for Ibor alternative
Isda AGM: New rate would complement rather than replace existing ones
LCH and dealers clash over loss allocations
Isda AGM: CCP equity should not be spared, say clearing members
Totally skewed: US annuity hedges magnify S&P volatility
Sales of fixed indexed annuities are soaring in the US. But dealers' hedging of the products is being blamed for pushing up S&P 500 skew, and their complexities are dampening banks' appetite to underwrite the instruments
Banks struggle to crack 'very complex nut' of IFRS 9
Move to expected loss impairment regime brings major challenges, say banks and accountants
Insurance Sifi rules squeeze the balloon on US annuities
Non-bank Sifis continue to sell assets, despite MetLife's court win
The week on Risk.net, December 9–15 2017Receive this by email