Disjointed regulation, CCP support and the future of swaps trading

Bankers lament growing global regulatory fragmentation: Piecemeal roll-out of Basel III will be “enormously costly”

Reporting rules key for EU-US swaps trading equivalence: Market participants welcome outcomes-based approach, but need clarity where rules differ

CCPs say central bank access needed to avoid liquidity crisis: Uniform access to deposit accounts and overnight liquidity vital, say market participants

COMMENTARY: New risks and old problems

The annual Risk USA conference opened in New York this week, and the atmosphere has been far from cheerful. Though the US has seen more than seven years of economic growth since the end of the financial crisis, the gains made in the post-crisis period now seem to be eroding, while new causes for concern are growing rapidly.

Last week, regulatory fragmentation made the news in the UK-EU context, with the continental regulatory consensus splitting apart in the wake of the UK’s Brexit vote. This week it’s a global concern, with speakers in New York warning that the implementation of the Basel III capital standards, the cornerstone of the post-crisis regulatory edifice, will be slower and more expensive as a result of the failure of different countries’ financial regulators to play well together. Even the regulations themselves are proving unco-operative, with some banks worried about a costly and intractable clash between the Volcker rule and FRTB requirements.

Meanwhile a senior regulator warned that growing interest rate risk, which he traced to the unusually low and stable rates environment since the crisis, was being under-appreciated by US banks – and could lead to sudden increases in stress, especially as the US Federal Reserve raises rates and tapers off its lending. Herding behaviour could also be a problem, as banks have tended to converge on similar risk models, often provided by the same small set of vendors, to model interest rate risk in the banking book.

There was some limited good news at the event, though. Poor culture and a lax approach to conduct risk were at the heart of the crisis, so it’s reassuring that Citi at least has taken some steps to overhaul its bonus system in order to improve this, even if some of the improvements (it’s no longer possible to excuse repeated conduct failures by pointing to profits made) seem obvious enough to be overdue.

STAT OF THE WEEK

The Federal Reserve proposal to add client-cleared notional trades to the complexity component of its annual systemic risk report could push a number of systemically important banks into a higher surcharge category and increase aggregate capital requirements by more than $10 billion – Fed postpones G-Sib capital change

QUOTE OF THE WEEK

“It used to be that investment banks were making markets in corporate bonds and holding a lot of inventory but that’s really dried up since the financial crisis with the Dodd-Frank Act” – Shane Shepherd, Research Affiliates