BlackRock, risk models and regulatory relief

At BlackRock’s West Coast AI lab

The firm is handing its ‘most vexing problems’ to artificial intelligence

EU seeks US-style freedom to delay rules

Power to grant “no-action relief” appears in proposals from EU Council and Parliament

National supervisors put pressure on global risk models

Varied supervisory and external audit demands stretch cross-border risk management

COMMENTARY: One size fits none

Several stories this week highlight the sources of resistance and delay to the rollout of common international regulations. All fall into a familiar pattern – almost, in fact, a vicious circle. Local conditions push national supervisors to call for exceptions, carve-outs and delays; the result is an uneven regulatory landscape that makes cross-border trade more difficult and cross-border comparisons less reliable; this divergence in conditions between countries makes common regulations even less practical; the calls for national variations in applying common regulations grow stronger; and so on.

At Risk’s Model Risk Management conference this week, delegates warned that national supervisors were making their jobs harder by insisting on national-level validation of models that were developed using a cross-border dataset. It’s hard to criticise the regulators for this – banks are international in life but national in death, and regulators are the bureaucratic expression of this fact.

Singapore’s relatively early adoption of the net stable funding ratio has priced its banks out of the swaps market, according to local dealers, who say that they – and their Australian and Hong Kong colleagues – are losing market share to the US and Europe, where the rule won’t come into effect until 2021. And in South Africa, the Fundamental Review of the Trading Book came under fire for being poorly adjusted to relatively illiquid local markets – meaning South African banks face unsustainable increases in market risk capital.

There’s no simple way to break this vicious cycle – the counterargument has always been that the long-term benefits of common regulatory standards outweigh their short-term costs, by allowing an easy flow of cross-border trade, finance and investment. But that doesn’t exactly fit the current political climate in a lot of countries. It’s not impossible that international financial regulation will follow the lead set by other areas of international cooperation – the latest Doha round of global trade talks, for example, stalled for the last decade. The post-crisis wave of international regulation may be the last for a long time.

STAT OF THE WEEK

Ten of the largest CCPs grew secured, committed credit lines by 40% to $70.3 billion and secured cash with banks, including reverse-repurchase agreements, by 32% to $43.6 billion over the six months to end-June. Top ten CCPs plump liquidity buffers by $20 billion.

QUOTE OF THE WEEK

“When more CCPs move to VAR [-based margin calculation methods], some hedge funds with sizeable positions will see their margin double as they are suddenly hit by new liquidity margin charges, as we saw for Eurex. Liquidity margin is one of those additional types of risk that a regulatory compliant margin methodology now needs to cover” – Peter Rippon, OpenGamma