Brexit margin calls, SwapAgent and the roots of op risk losses

BREXIT margin calls show limits of central clearing

LCH launches SwapAgent service for non-cleared market

SLOWDOWN drove op risk losses during crisis

COMMENTARY: Wait for next time

Further investigation into the chaotic aftermath of the Brexit vote in June has thrown light on the stress it inflicted on central counterparties (CCPs) and their members. Last month, it emerged one clearing house in particular, LCH, had come under fire for making several extremely large margin calls in the wake of the vote. But it was not the only one – estimates of the total margin demanded by clearing houses on June 24, the day after the vote, range from $25 billion to more than $40 billion, in several calls for intra-day margin, each of which had to be met within an hour.

Since central clearing was first proposed as a remedy for the counterparty exposures that did so much to spread the 2008 crisis, industry observers have warned this simply substitutes liquidity risk for counterparty risk. CCPs are caught in a cleft stick: the more they try to protect themselves and their  members by collecting additional margin as markets move, the more they increase the pressure on members already suffering from those markets.

In the event, every margin call was met without incident. But the truly worrying part is how few banks were involved – most of the volume in the cleared over-the-counter derivatives market goes through just a handful of banks. The failure of even one of these dominant players would be a truly shocking event. Yes, CCPs should be able to survive the default of their largest customer – even of their two largest customers. But if they were to impose 11-figure margin calls over a single day again – especially in a more long-lived and widespread crisis – would the consequences be limited to just two banks? "We survived that time" is not another way of saying "everything is fine and we should not worry".

STAT OF THE WEEK

Under the US approach, a fine exceeding that amount would establish a new operational risk capital floor, meaning a $14 billion settlement would require the bank to hold an additional $3 billion of operational risk capital.

QUOTE OF THE WEEK

Referring to Esma's original proposals to mandate segregated accounts in the custody chain, a global custodian says: "They held up their baby and said ‘look at our baby, isn't it wonderful?' We've said ‘Actually it's very ugly – we don't like it and this is why'."

ALSO THIS WEEK

US elections: whoever wins, Wall Street loses
Republican nominee is no fan of bankers and a Democrat Senate would block reform of Dodd-Frank

Vietnam plans to streamline commodity hedging rules
Regulator to simplify approval process for trades, but the market will take time to develop

Repo markets left guessing by new EU reporting rules
Record-keeping obligations of SFTR already in force, but no guidance on data fields

CSA reviews necessary after Sonia reform, lawyers warn
Benchmark administrator change may require amendments

DRW, Goldman, Wells Fargo back swaps regtech firm
Droit gets $16m capital boost to support growth of cross-border compliance service

European bail-in buffers may stretch market-making capacity
New Basel capital exemptions could be too small if all EU banks have to issue bail-in bonds

Regulators struggle to conjure the right leverage ratio
Too low, and it has no effect; too high, and liquidity suffers. Time for flexibility?

The decline of the cash empire
The last line of defence between us and punitive negative rates is paper currency

Reserving judgement: the BoE's divisive leverage ratio plan
Central bank reserves exemption may squeeze interbank liquidity, raise capital requirements

Esma set to backtrack on mandatory asset segregation
Maintaining the status quo would avoid disrupting securities financing and collateral reuse

Skewed views: banks, auditors split on CDS index trades
Views on risks and accounting treatment of arbitrage repack differ across the Street

Andrew Bailey looks to reboot UK conduct regulator's ‘mission'
New chief executive seeks to clarify approach after stumbles in past years, admitting global understanding of conduct regulation still at an early stage

Can the AMA be reborn?
Regulators could rescue op risk modelling through Pillar 2, writes former supervisor