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This is the second part of a 2-part post on LCH.Clearnet’s just published “Stress This House, A Framework for the Standardised Stress Testing of CCPs”, an analysis of risk management at CCPs. We look at the 5 elements required for a CCP stress test.
LCH.Clearnet has just published “Stress This House, A Framework for the Standardised Stress Testing of CCPs”, an analysis of risk management at CCPs. It is worth a look. This is part 1 of a two-part post.
A short research piece by Orçun Kaya at Deutsche Bank, “Liquidity is key for the central clearing of derivatives” (March 12, 2015) is worth reading. Kaya looks at where central clearing is likely to be successful and where it may not.
Automatic stays in the case of a default sends shivers down the spine of securities financing traders. If the non-defaulting party can’t liquidate immediately, it calls into question how much risk a trade absorbs.
We thought a recent article “How to avoid massive escalation in swap clearing costs” by Dominic Hobson on COOConnect was interesting and worth a post. It is part of a broader theme we are seeing a lot about: banks are getting savvier about allocating capital and liquidity costs and passing those costs along.
A new report from Finadium looks at what netting rules are most important for the buy-side, including hedge funds, asset managers and institutional investors, as they work to best position themselves with bank and broker counterparties.
The Office of Financial Research (OFR) published on February 12, 2015 “Systemic Importance Indicators for 33 U.S. Bank Holding Companies: An Overview of Recent Data“ by Meraj Allahrakha, Paul Glasserman, and H. Peyton Young, an interesting look at how individual banks score on systemic risk. This is the second of a two part post.
The Office of Financial Research (OFR) published on February 12, 2015 “Systemic Importance Indicators for 33 U.S. Bank Holding Companies: An Overview of Recent Data“ by Meraj Allahrakha, Paul Glasserman, and H. Peyton Young, an interesting examination on how individual banks score on systemic risk. We take a look in a two-part post.
On February 4th, the FSB issued a statement “FSB Chair’s Letter to G20 on Financial Reforms – Finishing the Post-Crisis Agenda and Moving Forward”. There were several interesting areas that are sure to be the FSB’s focus for 2015.
A February 3, 2015 article in Bloomberg “Meet the 80-Year-Old Whiz Kid Reinventing the Corporate Bond” by Edward Robinson caught our attention. It described a “new” product called “eBonds”…only its not really so new. The article is about John “Mac” McQuown, who has invented a financial instrument that combines corporate bonds and CDS protection on…
A February 1, 2015 article in Bloomberg “The Treasury Market’s Legendary Liquidity Has Been Drying Up” by Liz Capo McCormick and Daniel Kruger got us thinking about haircuts on HQLA. Is it time to re-think what the right level is given diminished liquidity?
Clearstream held its 19th annual Global Securities Finance Summit in Luxembourg last week. Once again it was a huge event with some 850 registrants. There were some important takeaways in both what was said and what was not said. Here are our highlights.
This article is the second in our series on securities finance-related activity in China. We cover liquidity coming from the People’s Bank of China, derivatives trading and the growth of the yuan in international financial markets.
The December 2014 Senior Credit Officer Opinion Survey (SCOOS) on Dealer Financing Terms has been released. As is usually the case, the interesting parts are the special questions.
On December 11, 2014, SEC Chair Mary Jo White gave a speech at a New York Times conference in New York, “Enhancing Risk Monitoring and Regulatory Safeguards for the Asset Management Industry.” She had some overdue comments on asset managers and transparency, particularly around securities lending activities. We review her comments and add what we…
ISDA released the results of a survey of derivatives users; focusing on how prepared they were for margin on non-centrally cleared trades. Looks like there is still a lot of work to do.
A new and complex dynamic has emerged in securities finance, whereby institutional investors are pulling assets from long-only fixed income portfolios in their agency securities lending programs. These funds are going into unconstrained fixed income portfolios (or nontraditional bond funds), now a US$153 billion investment category, up from US$51 billion in 2011, according to Morningstar….
We welcome the new year with one of the thorniest issues in financial regulation: how banks calculate their internal risk. Before the end of 2014, the Basel Committee for Banking Supervision (BCBS) slipped in a Consultative Document, “Revisions to the Standardised Approach for credit risk“. The Committee has made some important proposed changes and also…
Finadium for Investors is a new service from Finadium designed for asset managers, hedge funds, plan sponsors and other purchasers of bank services, equities and fixed income products. This subscription builds on Finadium’s successful 10 year track record providing leading market intelligence in securities finance and asset servicing to the investments industry. The additional reports…
Nomura won an Insurance Risk innovation award for 2014 and we offer our congratulations. The interesting part is what they did to earn the award. This is part of an ongoing theme of creativity in and around securities finance and collateral.
Earlier in November there was an interesting article in IFR by Christopher Whittall, “Fixed income trading enters new era”. It was focused on the principal versus agency models in fixed income. It is an understatement to say the fixed income trading and distribution business has undergone dramatic change, driven by cost and regulatory considerations. But…
Manmohan Singh, the IMF economist, has published a new paper “Limiting Taxpayer “Puts”—An Example from Central Counterparties” (IMF Working Paper WP/14/203), November 2014. We have long admired his work on collateral velocity and were interested to see what he had to say about central counterparties.
Delta One, synthetic financing and synthetic prime brokerage have long been a part of financial markets, but the upcoming introduction of Basel III capital rules is increasing their popularity. On the banking side, the drive towards synthetics meets the need to conserve balance sheet by netting transactions, move trades off balance sheet and/or manage as…
The Bank of England has just updated the Sterling Monetary Framework “Red Book”, adding explicit language about providing liquidity support to CCPs. This new liquidity backstop makes sense, but its easy to see how the idea would be criticized as creating a new kind of moral hazard. Here are the pros and cons.
The Bank of England recently published a paper “Dear Prudence, won’t you come out to play? Approaches to the analysis of central counterparty default fund adequacy” (Financial Stability Paper No. 30 – October 2014) authored by David Murphy and Paul Nahai-Williamson. It is a timely and interesting look at how the central bank views CCP…
The new Senior Credit Officer Opinion Survey (SCOOS), produced quarterly by the Federal Reserve, was just released. There were a couple things that deserved some investigation.
Finadium has released a new research report on the central collateral funding desk. This desk combines the operational functionalities of collateral management and a profit-oriented approach to acquiring and deploying collateral both internally and externally. While many financial services firms have consolidated some level of collateral operations and technology, this new approach looks to the…
We’ve been looking at bank quarterly filings for a number of data points, and one thing that surprised us was how different bank profiles were in the importance of netting relative to Level I and Total Assets. Some of this is self-evident given who the big players are in OTC derivatives, but the implications of which…
The FSB issued “Strengthening Oversight and Regulation of Shadow Banking Regulatory framework for haircuts on non-centrally cleared securities financing transactions” (October 14, 2014). This is the follow up to the FSB’s publication “Strengthening Oversight and Regulation of Shadow Banking Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos” (August 20, 2013). These…
Repo CCPs already exist. LCH and FICC run repo CCPs; so does the Canadian Derivatives Clearing Corp. But they only serve banks and broker-dealers. Why not investors too? Well, the risk waterfalls in CCPs require (some degree of) risk mutualization. Investors either cannot be subject to mutualization and/or do not want to be. The holy…
A September 17th article in Bloomberg “Bill Gross Used $45 Billion Derivatives to Lift Fund Gain” by Miles Weiss and Susanne Walker left us wondering if Pimco is having second thoughts about the repo market. Lets take a look.
As news continues to trickle in on ICE charging fees for LIBOR, and repo growing in importance, we ask where the tipping point is for investors and intermediaries to take a more serious look at a repo interest rate benchmark. The answers are not obvious.
A crowd of 30 generated a robust conversation at Finadium’s first securities lending and repo update last Thursday, September 18th in Zurich, sponsored by Zurcher Kantonalbank and Eurex Clearing. We summarize what we discussed, what we learned and where we see things going.
The BIS recently published a piece on collateral management. It is interesting to understand where they see both the opportunities and risks. We take a look at “Developments in collateral management services”, Committee on Payments and Market Infrastructures, September 2014.
The underlying agenda of the regulators is to get as much of the derivatives market on cleared platforms. But they recognize that it isn’t going to be possible to get all trades cleared. How to deal with non-cleared derivatives is tricky, especially when the entities trading with the banks are non-financials. The evolution of the…
Required Collateral for Cleared Derivatives reached just under $38 billion at the end of July, 2014 for the top 15 FCMs. Although the figures are up 73% since August, 2013, the overall numbers seem pretty low.
At the Fed’s Workshop on the Risks of Wholesale Funding on August 13th, there were presentations on repealing the repo safe harbor. This is an idea that has gotten some momentum lately, but we think it isn’t such a great idea. We look at a paper presented at the conference “Rolling Back the Repo Safe…
We’ve seen several reports and articles lately on collateral and risk management for non-cleared derivatives, including submissions from OMGEO, DerivSource and Finadium/Murex. The indication is that the topic is heating up. What are these papers saying and which ones should you read?
An article in the August 8, 2014 Harvard Law School Forum on Corporate Governance and Financial Regulation entitled “Nationalize the Clearinghouses!” brought up some interesting issues. We take a look.
There have been a couple articles on cross margining of derivatives recently, mostly focused on netting exposures within CCPs. This has been a hard nut to crack.
Interesting news and articles from the last week that we haven’t gotten a chance to talk about elsewhere, including MiFID and liquidity, a suggestion that Moody’s has preferenced ratings of bonds held by its corporate owners, and securities lending CCPs. Read on.
A revealing article in the Financial Times last week, “Goldman to sell up to €10bn bonds with new swap,” by Tracy Alloway and Michael Mackenzie, discussed Goldman’s plans to get financing on bond portfolios using Total Return Swaps (TRS). For readers interested in the interplay of financing and traded derivatives (which should be everyone), the…
The Financial Stability Board published on July 22nd a major report “Reforming Major Interest Rate Benchmarks”. They look at how the ‘IBORs could be reformed. The LIBOR scandal may have prompted the work, but it goes beyond that to include “risk-free rate” options available. Repo is part of the mix and we take a look.
Earlier in the summer there was a paper in the Journal of Derivatives that every person in securities financing should read. It is called “Embedded Financing: The Unsung Virtue of Derivatives” by NYU Stern Professor Bruce Tuckman. Let us explain.
The short answer is that the markets get messy and uncertain; we’ve seen this before with Fed Funds and OIS. Now the same situation could occur with US Treasuries, Gilts, other OECD government bonds and corporate bonds. What are the implications for this new market dynamic?
Some new and compelling news stories over the last week spark up talk about shifting collateral needs, and more importantly, fundamental changes to bond market liquidity that we could impact securities finance in a profound way. Here is our take:
In the last two posts on Single Treasury Futures (STFs), we reviewed the structure of the instrument as well as who might use them. In this post we will look at how STFs might differ from cash and repo positions from a balance sheet, capital, and margin perspective, and what that means for client demand….
Often people taking about collateral management gloss over that most collateral held against OTC derivatives is cash. We wonder if there are reasons for this that go beyond systems and zero interest rates.
Finadium has released a new report on strategic planning for non-cleared derivatives risk-based margining. This report is publicly available with free registration, courtesy of Murex.