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Talk of delaying IM ‘big bang’ sparks backlash
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New models sidestep Black-Scholes and could slash hedging costs for some derivatives by up to 80%
COMMENTARY: Clearing, the final hurdle
Banks and clearing houses have pushed back at suggestions – from a senior European Commission official – that the final phase of rules for non-cleared margin could be put off.
The reaction follows suggestions by Patrick Pearson, who heads the EC’s financial market infrastructure and derivatives unit, at a Risk.net conference in London on May 14. Pearson urged the industry to “keep banging the drum” for a delay.
But dealers and clearing houses tell Risk.net the thought of a delay – “dragging out the pain” – is not appealing. They say the industry has had plenty of time to prepare for the incoming requirements, unveiled more than a decade ago as part of the Group of 20’s post-crisis reforms.
Global non-cleared margin rules require over-the-counter derivatives counterparties to post initial margin against bilateral trades when outstanding notional breaches a certain threshold. When, in September 2020, that threshold drops to $8 billion, phase five – the ‘IM big bang’ – will capture hundreds of buy-side firms.
Indeed, at large dealers, the rules already mandate the posting of initial margin and are having a big effect on notional amounts of cleared derivatives outstanding. In March, for example, Risk.net reported that cleared notionals across the eight US global systemically important banks climbed by $6.9 trillion (8%) in 2018.
It is likely that the non-cleared margin rules that came into force for around 20 firms in September 2018 expanded the pool of counterparties – on top of the 40 already captured in prior years – with which bilateral trades have become more costly.
What is also being observed is that the bilateral derivatives portfolios of those banks are attracting heftier risk weightings under capital rules today than they did in 2015 – although they are much smaller.
Cleared notional growth is expected to continue to outpace that for non-cleared trades, as the rollout of the rules encourages banks to replace expired client trades with cleared iterations to avoid onerous margin and operational costs.
STAT OF THE WEEK
Taking the financial crisis out of the lookback window has turned the risk profile of Morningstar’s fund ratings on their head. With the financial crisis in the lookback window, half of the funds with the highest 10-year ratings also had low betas in the bottom 20% of all funds. Now, over 90% of top-rated funds have betas greater than one, meaning they are theoretically more volatile than the market.
QUOTE OF THE WEEK
“I always say banks don’t manage financial crime; they manage the regulatory risk associated with financial crime” – Richard Carrick, regional head of financial crime assurance for the Asia-Pacific region at Barclays.
Credit: Google News