Digital offices, Brexit swaptions and forex derivatives

The week on Risk.net, July 7-13, 2018

Rise of the cyborgs: tech remakes the front office

Dealers “have no choice” but to change, says UBS’s Orcel – and plenty of changes are coming

Brexit threatens some swaptions trades

Force majeure clauses could be triggered on physically settled contracts

Dealers slam ‘nonsensical’ treatment of forex derivatives

Proposal on US swap dealer threshold rekindles debate on definition of NDFs and window forwards

 

COMMENTARY: It’s not about speed

The flashiest and most visible financial software applications are those related to trading; algorithms that handle high-speed trade execution make headlines (and Michael Lewis books), and hit all the right buttons about super-fast, ruthlessly clinical machines making humans obsolete.

But the fundamental technological changes on the horizon now for the financial sector are in rather less glamorous (but still critical) areas – and they’re being driven as much by the need to cut costs and comply with regulations as by a love of speed and profit. In a way, it’s much like the airliner industry in the 1960s: glamour and attention was paid to Concorde and its supersonic rivals, the Boeing 2707 and the Tupolev Tu-144, but what really changed the world was the dowdy and ugly Boeing 747 jumbo jet, which made cheap long-haul air travel possible for the first time.

This week, Risk.net looked at various ways in which the latest digital revolution is affecting the front office. And the story that emerges is less about human traders being replaced by vast, unsympathetic artificial intelligences, and more about the growing collaboration between humans and ever more sophisticated machines – what’s been called, in other contexts, assisted human operations.

With support from capable AIs, traders and sales staff will be able to handle larger numbers of diverse customers more effectively and quickly, conserving their efforts for the few largest or most specialised accounts. Among examples of this development already in play, the Symphony messaging platform is seeing marked a rise in users, keen to take advantage of its open-source approach to build their own automated chatbots and trade applications. There has even been progress in one of the trickiest areas for financial technology – making the neural networks that underpin much fintech transparent enough to satisfy regulators.         

It has been centuries since manufacturing workers started to change from makers, rather than minders, of machines; the process is now well under way in finance as well. The reassuring news is that the biggest changes may come from human-machine co-operation, rather than replacement.

 

STAT OF THE WEEK

Data from this year’s Dodd-Frank Act stress tests of major US banks show 43% of total losses projected under the severely adverse stress scenario across 12 of the largest participants were due to trading and counterparty risks. However, market RWAs represent just 13% of total RWAs on average for banks in this sample.

 

QUOTE OF THE WEEK

“In [the] case [where] there is a market risk – as in trading book activities – that puts their balance sheet at stake, it seems quite logical to apply the same framework for investment firms and banks. Having said that, ACPR is in favour of a proportional approach regarding investment firms, like many other authorities. We should strike the right balance between a level playing field and the proportionality principle for investment firms. The overarching principle is that the same activities entailing the same risks should be subject to the same framework” – Frederic Hervo, Autorité de Contrôle Prudentiel et de Résolution

Further reading

• Markets

Hunt for toxic flow hits one of banking’s old problems

• 12 Jul 2018

• Our take

A real-life stress test for CCP margin

• 11 Jul 2018

• Regulation

Q&A: French regulator defends bank rules for prop traders

• 11 Jul 2018

• Risk Quantum

FRTB: trade bodies reveal threat to risk factor modellability

• 10 Jul 2018

• Asset management

Passive funds turn predator in pursuit of pricing edge

• 13 Jul 2018

• Markets

FCA could kill off Libor, says Bailey

• 13 Jul 2018