Dealing with disputes
Pockets of the financial system are stabilising. Stock markets have appreciated rapidly in the past several months, with many equity benchmark indexes in the region back to levels reached prior to the collapse of Lehman Brothers in September last year. The 'fear gauge' Vix index, which measures expected 30-day volatility of the S&P 500, is trading in the 20-30% range, having fallen dramatically from its high of 80.86% on November 20, 2008.
Investment banks are again making money. Revenues from trading activities at financial institutions ranging from Barclays Capital to BNP Paribas and from HSBC to Goldman Sachs have stood up well during the first half of the year. Indeed, these investment banking revenues are often supporting other areas of business where growth prospects remain challenging and bad debts continue to rise. Meanwhile, banks that let go thousands of staff during the first two years of the financial crisis are once more in hiring mode.
Some of the high-profile disputes between investors and banks are also coming to an end. Hong Kong's two main financial regulators reached a deal with 16 distributors regarding their sale of credit-linked notes called minibonds to retail investors in July. The banks have agreed to buy back minibonds at 60% of the nominal value of the original investment for customers below 65 and at 70% for customers aged more than 65. There may also be some additional monies returned depending on recovery values associated with these investments. The agreement in Hong Kong follows an attempt to close the matter in Singapore in June (Asia Risk, July 2009).
Bank distributors in both jurisdictions will also need to improve their sales practices before they can offer retail structured products. And they are not the only financial institutions that should devote more time to improving internal practices.
With the pick-up in financial markets, dealers are once more pitching non-linear products to clients. One hopes they have learnt their lessons and are selling these instruments in an appropriate fashion. There is solid evidence that some leading investment banks sold highly leveraged option positions in 2007 to clients that were simply not in a position to price the options and fully understand the risks.
While the trade documentation may have legally been sound - and there are plenty of cases still going through the courts to test this - there is evidence many transactions were done in 'bad faith'. The trades took place in many cases despite objections by the banks' own internal risk control and compliance functions. Banks have made huge profits from their customers' mispricing options, but troublesome disputes look set to rumble on for some time to come.
Christopher Jeffery.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Risk management
SEC leadership change puts Treasuries mandate under scrutiny
FICC clearing models approved, but critics think delay could revive prospects of done-away trading
Markets Technology Awards 2025: Untangling the knots
Vendors jockeying for position in this year’s MTAs, as banks and regulators take aim at counterparty blind spots
Risk Awards 2025: The winners
UBS claims top derivatives prize, lifetime award for Don Wilson, JP Morgan wins rates and credit
An AI-first approach to model risk management
Firms must define their AI risk appetite before trying to manage or model it, says Christophe Rougeaux
BofA sets its sights on US synthetic risk transfer market
New trading initiative has already notched at least three transactions
Op risk data: At Trafigura, a $1 billion miss in Mongolia
Also: Insurance cartels, Santander settlement and TSB’s “woeful” customer treatment. Data by ORX News
Cyber risk can be modelled like credit risk, says Richmond Fed
US supervisors may begin to use historical datasets to assess risk at banks and system-wide
The changing shape of risk
S&P Global Market Intelligence’s head of credit and risk solutions reveals how firms are adjusting their strategies and capabilities to embrace a more holistic view of risk