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ROE hurdles cause pricing impasse
In the Basel III world, traders know their business must deliver a target return on equity, or risk being shut down – but working out the capital cost, or benefit, of a trade at inception is so difficult that banks only have approximations to guide them. For now, anyway. Laurie Carver reports
![tim-gately tim-gately](/sites/default/files/styles/landscape_750_463/public/import/IMG/299/277299/tim-gately-580x358.jpg.webp?itok=JmlBa7l_)
Capital is the great constraint on derivatives businesses these days, so it makes sense that their performance should be measured as the revenue bang for the regulatory buck – return on equity (ROE) under Basel III. That sounds simple enough, but while it's easy to set bank-wide or business-wide ROE hurdles, applying them on a trade-by-trade basis is creating a mind-boggling array of problems for pricing and organisation.
"Through the hurdle rates, capital is increasingly becoming the driver of
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