Shanghai clearing, mis-selling and shadow banking

The week on Risk.net, July 8–14, 2016

 

SHANGHAI to be first CCP to clear forex options

GOLDMAN "hid derivative profits" from LIA 

SHADOW BANKING support rules still a mystery


COMMENTARY: Mis-selling claims faced by big banks

Risk.net was dragged into court this week – in the sense that its past coverage has been presented as evidence in a case in which Goldman Sachs is accused of using so-called P&L amortisation to hide profits on derivatives deals. The 2014 Risk.net article reported whistleblower claims that Goldman Sachs inflated valuation statements sent to clients. This week in London, the High Court heard claims the bank had used similar techniques on a series of derivatives trades with the Libyan Investment Authority (LIA) – trades that collapsed after the failure of Lehman Brothers in 2008. The claims are now the subject of a suit claiming the sovereign wealth fund was deceived.

Other news this week highlighted the damage banks can suffer if they are found misleading investors, in this case breaking rules on the sale of retail structured products. Several are now mourning the loss of the US's "well-known seasoned issuer" status, allowing them to sidestep the requirement for detailed prospectus material. In many cases, the status was revoked after the banks were found to have omitted or concealed crucial information about their products, or otherwise misled investors.

And a mechanism aimed at simplifying securitisation issuance also hit trouble this week. EU plans for "simple, transparent and standardised" (STS) securitisations promise a reduction in capital charges, but at the cost of extensive compliance requirements (for both issuer and investor) and the potential of huge fines for breaches. That cost is proving too high for many of the banks that would otherwise have joined in, but which are now planning to forgo STS certification.


STAT OF THE WEEK

BAML sold $150 million worth of the Strategic Return Notes in 2010 and 2011 to around 4,000 retail investors, according to the SEC order. The notes were initially valued at $10 but matured in November 2015 with a redemption value of 50 cents – a 95% loss. The poor performance is explained largely by the drop in forward implied volatility for the S&P 500.

 

QUOTE OF THE WEEK

"There aren't consistent standards for measuring leverage. There are different bits of information being reported and the information is then not comparable across jurisdictions", Jennifer Wood, Alternative Investment Management Association

 

ALSO THIS WEEK


China opens up onshore swap market but hurdles remain
Foreign investors can now hedge CNY bonds, but dealers expect limited uptake

Brexit is a tragedy for EU financial services regulation
Loss of influence belies critical role UK played in crafting sensible financial regulation

PRA invites post-Brexit transitional recalculations
UK regulator invites firms to recalculate smoothing effect to ease the pain of higher risk margin


CFTC proposal would unleash flood of lawsuits, firms say
Industry blasts proposal to allow private manipulation suits in US electricity markets

Credit veteran rewrites the alphabet of risk modelling
Scott Aguais helps banks go from point-in-time to through-the-cycle, and back again

Esma grasps at solution to Mifid data woes
UK to stay in data aggregation project despite Brexit

 

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