"The looming threat of a downgrade to South Africa's sovereign credit rating has forced some of the country's largest banks to take radical action to ensure access to overseas central counterparties (CCPs), with some fearing that a cut to junk status would preclude international CCPs such as LCH from allowing them to onboard."
"The University of Cambridge Centre for Risk Studies has released a report exploring the potential impact space weather could have on the U.S. economy and insurance industry, noting that its stress test scenario shows the insurance industry could face losses of as much as $334 billion."
"The definition of a “safe” asset is undergoing a secular shift. The higher bond prices rise, the greater the risk to bond values from even moderate increases in inflation and interest rates. The traditional negative correlation between bonds and risk assets also appears less reliable, and there are heightened concerns about the underlying liquidity of key parts of the fixed-income market."
"When approaching Basel III and its leverage ratio requirements, the paper suggests that repo desks will be forced to decrease the volume of business they transact in or find extra opportunities to net financing transactions. Such measures would lead to repo desks maintaining their volumes while shrinking the ‘footprint’ of their matched books. Under Basel III leverage ratio measures a 3% non-risk-weighted ratio for all balance sheet assets, including securities financing transactions, applies. In addition, the US Dodd-Frank Act applies a further 3% for US-regulated globally systemically important banks, thus taking the leverage ratio to 5-6% of balance sheet assets. As such, the leverage ratio makes low-margin, high-volume business in highly rated securities, i.e. repo trading, an expensive business for traditional sell-side participants."
"A new catastrophe bond has been launched which aims to be the first to cover temperature related weather risks since 1999, as sponsor Allianz Risk Transfer seeks $70m of coverage against European winter temperature extremes through a Market Re Ltd. (Series 2016-5) deal."
"LCH has shelved plans to launch a US repo clearing service after concluding the project would take too long to complete."
"Under CME Group’s proposal, a DFP could clear all of its eligible proprietary CME Group trades directly with the CME clearinghouse but would not be obligated to contribute to CME Group’s guaranty fund or otherwise be responsible in case of a default by another clearing member. Instead, all of a DFP’s obligations (except for obligations arising from disciplinary actions against a DFP) to CME Group would be guaranteed by at least one other clearing member – termed a “DFP Guarantor” – that must also be a CME Group clearing member and be registered with the CFTC as a futures commission merchant."
"This paper studies the regulatory incentives of U.S. public pension funds to increase risk-taking arising from their unique regulation linking their liability discount rates to the expected return on assets, which enables them to report a better funding position by investing more in risky assets. Comparing public and private pension funds in the U.S., Canada, and Europe, U.S. public funds seem susceptible to these incentives. More mature U.S. public funds as well as funds with more political and participant-elected board members take more risk and use higher discount rates. The increased risk-taking of U.S. public plans is negatively related to their performance."
"IMAGINE two kinds of investment funds, both of which have the same aim: to provide pensions for their employees. You might think that they would invest in a similar way. But when it comes to American pension funds, you would be wrong. It turns out that public funds have a rather different, and more aggressive, approach to risk than private pension funds (and indeed than their counterparts in other countries)."
Chinese regulators opened up the interbank bond market to a wider range of foreign investors, such as commercial banks and fund managers, in February. Those entities will also have access to the onshore interest rate derivatives markets, though only for hedging purposes. Foreign investors may have to use local documentation, especially for mandatorily cleared interest rate swaps. Standardised interest rate swaps must be cleared at the Shanghai Clearing House, which has not gained equivalence under US and EU regulation, meaning banks could face a capital hit. Interest in the cash bond market will also be restrained because foreign investors cannot access onshore foreign exchange derivatives markets.
The authors, Samim Ghamami and Paul Glasserman, compare the total capital and collateral costs when banks transact only bilaterally to the capital and collateral costs when they clear only through CCPs. The evidence suggests that central clearing is sometimes more expensive.
Jonathan Hill, the UK's departing European Commissioner for financial services, has added his voice to calls to allow dealers to offset derivatives exposures in the leverage ratio with client clearing collateral. This threatens to deepen a European rift with US authorities on the Basel Committee on Banking Supervision (BCBS), as the Bank of England (BoE) has also reiterated its existing support for relaxing the leverage ratio.
Securities Finance and other forms of OTC derivatives have always had the effect of shifting and “rehypothecating” collateral and credit risk between the parties to the transaction. Some activities, like CDS trades, are explicitly designed to commercialize the exchange of risk; others, like securities loans, shift risks as a byproduct of the trading intent.
The steady fall in the cost of reinsurance coverage has now typically made it the cheapest and most efficient form of contingent capital, when compared to ceding companies equity, debt and own
In what should be required reading for anyone interested in financial history and the Global Financial Crisis of 2008-2009, Professor Laurence Ball of Johns Hopkins University has released “The Fed and Lehman Brothers,” a 214 page analysis of what really happened at the Fed that resulted in no liquidity support for Lehman Brothers and the ultimate massive disaster that follows. Here’s our summary.
At issue is massive reform of money market funds due to come into effect on October 14 and which will see such funds be required to float their net asset values (NAVs), adopt liquidity fees, and install redemption gates. The measures are an attempt to prevent a repeat of part of the crisis, which saw one prominent money market fund — The Reserve Primary — "break the buck" when its NAV dropped below $1 a share.
Specialist longevity risk information provider Club Vita and insurance and reinsurance player Legal & General have teamed up to bring longevity risk transfer to a wider audience of pension schemes, with the goal of providing an automated longevity insurance pricing service.
Smart financial contracts built using blockchain technology could save banks billions of pounds by streamlining processes and obviating back-office legal work, said bank technology experts at the London Fintech Week conference on July 20.