Contributor: Daniel Parker
This blog post was originally published on TabbFORUM.
New rules have recently come into effect that have substantively changed the customer collateral asset protections relevant to central clearing.
Specifically, the Dodd-Frank Act prescribed that the CFTC adopt rules that provide for enhanced protections of cleared swaps customer margin collateral. The mandate is known as “legal segregation with operational commingling,” or LSOC. LSOC provides a fundamental change in how futures commission merchants (FCMs), as members of central clearing counterparties (CCPs), must manage customer margin collateral.
As a result of these rules, there was an initial flurry of activity to automate compliant processes. For instance, the first phase simply provided a bridge whereby FCMs reported excess collateral without reaching individual-customer-level granularity.... read more
senior product specialist, SunGard's capital markets business
Contributor: Magnus Almqvist
A version of this blog post was originally published on the Chartis RiskTech Forum.
It’s 2007. Imagine a small-cap company, such as a family-run farm, and imagine the farmer needs to renew a loan he has with his bank. The bank salesman thinks in terms of rolling over a swap, and proposes a structured product protecting his client from rising interest rates. The downside is the collateral flow if interest rates hike south. The farmer, not as concerned about falling interest rates as he is about borrowing money, looks to the upside of protection if interest rates go up and perhaps doesn’t understand that a loan could carry risk if interest rates go down. He does not ask, and it’s pretty obvious he does not fully understand the product he is buying. But he trusts his banker. From the farmer’s viewpoint, the bank is a trusted institution with the best interests of its clients at heart.... read more
Contributor: Daniel Parker
A version of this blog post originally appeared in Securities Lending Times (p 16).
The overarching mandate of financial reform is to mitigate the potential risks associated with systemically important financial activities and institutions. Statutory authority has purposely reserved an abundance of discretionary authority for the regulators to capture and reconfigure processes that have “an effect upon,” covered activities.
As a means of exercising this reservation of authority, rule-makers as well regulatory-framework-setting bodies now seek to target shadow banking.
For instance, the Financial Stability Board (FSB), which itself does not have rule-making authority yet is considered a persuasive advisory body concerning international standards within the financial system, seeks to “mitigate the spill-over effect between the regular banking system and the shadow banking system.”
Additionally, the Financial Stability Oversight Council (FSOC), which has rule-making authority under Section 120 of the Dodd-Frank Act, seeks to enhance and substantively modify the shadow banking space. The FSOC has concluded that the current state of shadow banking contributes to systemic risks. As a result, it now seeks to address the perceived bank-like activities that pose risks by subjecting shadow banking, and related activities such as money market mutual funds, (MMFs), and securitization activities to more onerous oversight. ... read more
senior vice president, Astec Analytics, SunGard’s capital markets business
Contributor: David Lewis
This blog post was taken from the Astec Analytics Securities Lending Focus for April 2013.
In the early 18th century, the bursting of what became known as the South Sea Bubble broke many fortunes. The East India Company, riding high on the global dominance of the British Empire, issued huge quantities of highly priced stock to hungry investors who believed the company’s monopoly on South American trade could not fail.
Unfortunately, they were wrong, and their clamor for the shares blinded them to the fundamental weaknesses of the company. A sudden realization burst the bubble, and the shares became worthless almost overnight. I am not, of course, directly comparing certain countries’ debt issuance with that of incompetent 18th century industrialists, but there is a certain similarity in the desperation of investors seeking safe places to put their money and the resultant bubbles in prices such actions create. ... read more
vice president, risk solutions, SunGard's capital markets business
Contributor: Marcus Cree
This blog post originally appeared on TabbFORUM.
Risk can and should be seen as the core of a financial institution. The management of risk has become an industry in itself, led in turn by regulatory drivers, technological advancement, trading floor developments and quantitative research. In this blur of evolution, it is easy to lose sight of exactly what is required of the risk department, and it is worth taking a step back to refocus on what is important.... read more