Volcker, US repo and the risk-advisory robot

Regulators rethink Volcker overhaul to solve accounting glitch

Bankers urge cancellation of new definition of prop trades that could capture liquidity buffers

HSBC and the risk-advisory robot

Bank has amassed 10-petabyte pool of client data to spot hedging, financing and payments needs

FICC takes firm grip of US repo market

Central counterparty wrangled more money market repo cash than banks did by end-2018

COMMENTARY: Stumbling over Volcker

The Volcker rule restricting US banks’ involvement in proprietary trading has been under fire since its 2010 birth. With the global financial crisis that spawned it now fading comfortably into history, and a US government inclined to listen favourably to financial industry complaints, rolling it back seems like an obvious move – part of a programme of regulatory easing set to bring US banks benefits worth billions of dollars.

However, this hasn’t proved as easy as it sounds. Previous reform proposals have run into conflict with other regulation. The most recent attempt to reform the rule was criticised as likely to ramp up compliance costs rather than easing their burden – and this week US regulators started to backpedal again.

The reform aimed to simplify compliance by changing the definition of which assets should be counted as ‘speculative’ – but rather than give banks more freedom to manoeuvre, it could now capture hedges and liquidity reserves as well, increasing the burden of Volcker compliance.

There won’t be movement on this issue any time soon. The proposals, made in July last year, are still a long way away from being transformed into rules by the five involved regulators, and the shutdown of parts of the US government will not help matters. Reportedly, there’s some backing for the less controversial parts of the changes to be passed through relatively quickly. And with a new party in power in the US House of Representatives – with the new financial services committee chair, Maxine Waters, promising tougher oversight of both banks and industry-friendly regulators – the political calculus could become more complicated still in the weeks ahead.

In the end, the industry may hit on a consensus interpretation without waiting for the regulators. A great deal of time and money has already been spent preparing to comply with some form of the rule, and proprietary trading by banks has dwindled. The final details may have only a limited impact on banks’ behaviour. An odd situation – but, politically, these are odd times.

STAT OF THE WEEK

A European supervisory benchmarking exercise found 36 out of 49 banks (74%) produced modelled capital requirements that under- or overestimated the benchmarks. Twenty-one firms (43%) produced negative deviations – meaning they underestimated own-fund requirements – of which three (6%) were deemed to be unjustified.

QUOTE OF THE WEEK

“It is clear from my discussions with the next generation of quantitative analysts that the lessons of the recent past are in danger of being forgotten, or worse, ignored” – Gordon Lee, UBS