Wrestling with correlation
The correlation risk inherent in most structured products represents an ongoing headache for manufacturers. While new regulatory proposals would affect how much risk banks keep on their books, market dynamics are at play, especially the rise in correlation attributed to the popularity of financial instruments such as ETFs. Sophia Morrell reports
After the opening weeks of 2010, realised equity correlation appears finally to be normalising to former levels after spiking throughout the financial crisis. But the management of correlation risk is still causing tense divisions across the financial industry for both bankers and regulators.
The latest stage in an ongoing battle between banks and the Basel Committee on Banking Supervision over capital requirements for correlation trading was revealed in late January.
Banks will be allowed to
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