Cyber risk, Libor replacement and dangers of low rates

FCA proposes synthetic Libor

EU MONEY FUND RULE imperils negative rates management tool

CYBER INSURERS accused of lax underwriting standards

COMMENTARY: If this goes on

Nothing seems to last quite as long as a temporary state of affairs. This week, fund managers voiced concerns on two aspects of the investment climate: some worried about what would happen if things went on as they are and others worried about what would happen if they didn’t.

Central bank intervention in the wake of the 2008 financial crisis and the 2011 eurozone debt crisis has produced an unprecedented period of low and stable interest rates. The resulting negative rates are a problem for constant net asset value funds, which pass on the losses by cancelling some shares, preserving the value of the rest, but the European Securities and Markets Authority (Esma) says proposed new rules will block this practice. Conversely, worries are growing in the US over products that allow investors to profit from the quantitative easing-induced low volatility of equity markets by shorting the Vix volatility benchmark: Vix is at near-historic lows and a sudden spike in volatility could push the products into a “doom loop” if their rehedging after a volatility spike causes it to rise further.

Both these stories are, in a way, reassuring. They’re certainly a contrast to the trumpeting of a “Great Moderation” in the mid-2000s, allegedly produced by advances in risk transfer and securitisation. Those stories claimed crises would be a thing of the past, and disaster scenarios such as a US-wide property-price crash seemed unthinkable. Keeping an eye open for the risk of a systemic upheaval makes good sense; nothing comes to an end more quickly than a permanent state of affairs.

STAT OF THE WEEK

LCH has by far the largest gross notional volume in interest rate swaps in the four major currencies of any major clearing house. In the first six months of 2017 it cleared a cumulative volume of $145 trillion, up 43% from the equivalent period in 2016, out of a total of $160 trillion.

QUOTE OF THE WEEK

Esma will announce position limits on commodity derivatives in November. “It has been raised at the European level by industry bodies that a very clear risk exists of publishing limits so late in the day that there could be a rush to sell. It could introduce disorder into the markets where people are trying to shift their positions within a six-week or four-week window. Any doomsday scenario would happen when the position limits are published and if it was something entirely unexpected that caught out a lot of members and clients” – Katy Hyams, LME