Basel floors, cyber risk and the Quant Finance Master’s Guide

The week on Risk.net, June 16–22, 2017

BASEL CAPITAL FLOOR details still unclear

OP RISK focus on cyber at New York conference

QUANT FINANCE MASTER’S GUIDE published on Risk.net

 

COMMENTARY: Catching up online

Conversations on and off stage at OpRisk North America this week were inexorably drawn to the topic of cyber risk – even despite the Cyber Risk North America event running alongside it. Regulators and practitioners alike highlighted the business continuity risks posed by a major cyber attack, emphasised the need for rapid recovery from an outage, and called on businesses to improve their planning and modelling. More positive aspects of the IT revolution also received close attention, with cognitive computing systems (such as IBM’s Watson) touted as the solution to automating increasingly onerous compliance requirements.

But it’s hard to avoid the impression of an industry that has been left behind and is now playing catch-up. Panellists in one discussion noted that other industries, such as medicine, have been far quicker at adopting cognitive computing as a decision support tool. And while major banks are setting up their own in-house fintech incubators or ‘venture capital’ investment projects, progress has been slow. Some have even resorted to circumventing their own vendor acceptance checks to bring fintech startups on board more quickly. Industries such as publishing and travel have been revolutionised in the past decade – finance, less so, despite the urgent need for technology to reduce the unsustainable operational and compliance costs faced by the banking industry.

Part of the problem stems from the conservatism of the risk and compliance departments. Certainly there’s no problem getting banks to accept innovation in the trading and structuring areas – the largest trading floors in the world are now silent, with electronic trading the order of the day. But, in large part due to the crisis and its aftermath, regulators and major institutions are understandably more cautious of short cuts. Put simply, other industries innovate faster because they can be trusted to do so in relative safety: this is not the case with finance.

There are other issues as well – reliance on legacy systems, high barriers to entry for more innovative financial startups, and the non-negotiable position of the industry on data confidentiality, integrity and availability. None of those will change any time soon, so it seems the financial sector will to continue to be a relatively late adopter. The priority however must be to ensure that it doesn’t fall behind in cyber defence as well as in innovation.

 

STAT OF THE WEEK

The average daily volume of interdealer US repo trading at Dealerweb has more than doubled since it launched electronic trading of US repos in June 2016 – reaching $177 billion last month compared with $80 billion a year ago.

 

QUOTE OF THE WEEK

“Why would [a science or mathematics graduate] want to work for a bank today when you can work for the next Google?” – a senior derivatives structurer at a French bank

Further reading

• Asset management

SEC liquidity rules may trigger forced sales, funds warn

• 20 Jun 2017

• Asset management

BlackRock’s Prager backs unified fixed-income trading concept

• 20 Jun 2017

• Our take

US learns to play the Basel game

• 20 Jun 2017

• Mifid

Numbers game: Mifid guidance adds to swaps trading confusion

• 19 Jun 2017

• Markets

DTCC’s $74 billion liquidity charge riles members

• 16 Jun 2017

• Risk management

Revised SMA could allow banks to ignore past op risk losses

• 16 Jun 2017

• Operational risk

CCAR helps identify op risks, banking experts say

• 21 Jun 2017

• Risk management

Banks move to model smaller op risk losses

• 22 Jun 2017