Margin problems, liquidity tests and passporting

MARGIN TIMING will be a problem for the buy side

LIQUIDITY STRESS TESTING vital, ECB supervisor says

PASSPORTING a key issue for UK banks post-Brexit

COMMENTARY: The errors of margin

At the moment, it's difficult not to envisage the mind of a derivatives trader as a large circle representing WORRIES, divided neatly in two, with one half labelled MARGIN REQUIREMENTS and the other EVERYTHING ELSE. Most of the MARGIN REQUIREMENTS worries this week had to do with the dwindling time before various regulatory obligations come due.

The largest dealers became subject to the new margining regime for non-cleared derivatives trades at the start of this month – not without problems, as Risk.net reported at the time. The next phase of the roll-out is a big-bang requirement to post variation margin, which applies to all covered firms – large and small – from March next year. That leaves little time for these firms to make the required documentation changes, and banks are already warning many will not be able to negotiate terms.

With little time for testing in the run-up to the phase 1 start date on September 1, many large US banks are missing margin posting deadlines on transatlantic trades – the time difference gives them five hours less than their European counterparts to hit the one-day target. Elsewhere, entire countries may be set to miss the March deadline, with four major Asian markets still to publish their own rules.

And margin rules are not just a worry (or, rather, a WORRY) for non-cleared derivatives traders. The US Commodity Futures Trading Commission renewed its dispute with EU authorities this week over margin holdings by central counterparties, arguing EU rules create large and underestimated systemic risks.

But it is important, in this context, to distinguish between a worry and a crisis. Bringing the new margin requirements into effect will be taxing and frustrating for many market participants, and it will doubtless be expensive. But that's the nature of the business; worry and frustration and cost are what risk management is all about. One plausible alternative is systemic crisis, regulators might argue, which would make concerns over margining rules seem petty in comparison.

STAT OF THE WEEK

At the start of 2016, nearly 28% of long equity hedge fund assets were invested in the 100 most crowded stocks. However, these positions were hard-hit by a momentum reversal in January, which triggered a vicious cycle of de-risking that resulted in $100 billion of liquidations across the top 100 stocks owned by hedge funds.

QUOTE OF THE WEEK

"I really don't want the regulators to get the impression that everything is OK. It's not. Put simply, they may be doing victory laps because the rule went live on time, but we're not really complying with the rule right now" – a senior risk manager at a major US bank

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