Derivatives

Comments on derivatives, their nature and control

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MiFID2 Pre and Post Trade Transparency

The upgrade to the trading transparency regime is one of the largest components of MiFID2.  MiFID1 was very equity focused while MiFID2 has a vast scope across financial markets.  The regime focuses on three areas;

  1. Pre-Trade – When should orders be public?
  2. Pre-Trade – When should quotes and expressions of interest be public?
  3. Post-Trade – When should executed trade details be made public?

Financial instruments are divided into asset classes, sub asset classes and sub classes and their liquidity assessed.  Asset classes include bonds, interest rate derivatives while the sub classes cover areas like the maturity and underlyings of derivatives.  The liquidity assessment uses several methods and some of the levels are initially more relaxed being tightened over the next few years.

More liquid products (like equity shares) will be required to make more activity public while illiquid products will have waivers to allow participants to disclose less pre trade information and to defer publication of trades executed.  Generally, the rules are split between those for equity like instruments (shares, depositary receipts, ETFs, certificates) and non-equity-like (bonds, structured finance products, emission  allowances and derivatives).  Equity publication may be deferred one or two hours or until the end of day while non-equity-like publication may be deferred for two business days.  There are also provisions for regulators to effectively suspend the whole non-equity regime for months where a liquidity crisis occurs (MiFID2 is peppered with special rules covering government debt markets).

The detailed analysis can be found here.  These rules should also be viewed with the new requirements over the provision of best execution and the evidence that investment firms will need to keep to prove their compliance.

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The Challenges of Operational Risk

Operational Risk like much of banking has just come through a tough time where despite serious improvements in the structure of its risk management the Basel Committee is recommending the removal of internal model approval (mostly due I think to their failure to estimate the enormous losses of the last few years as conduct related fines have hit the industry).  Here’s a short article comparing Operational risk to Market and Credit risk to show the gaps and challenges facing it.

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Banking Interviewers’ Guide

I think most of us at some time or other end up rushing to an interview, not having reviewed the candidate’s CV properly and with no real idea of what appropriate questions to ask.  Well I can only advise, do read the CV before the interview but in terms of the questions here’s a little app for those on Android phones to help you out on the questions.  If you’ve got some good questions of your own you’d like to donate please email me.

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FRTB Model Approval and P&L Attribution

The FRTB has much tougher criteria a firm must meet for it to gain internal model approval to use its models to compute its market risk capital requirement.  One very significant component of the new rules are tests on the firm’s official market risk figures.  The tests use the risk figures to compute a “Theoretical P&L” at a trading desk level which then gets tested for accuracy using two statistical measures.  Daily data is tested monthly and if the firm fails either of the tests in four months out of the previous twelve months the desk in question has to use the standardised approach which could at the very least double its capital requirement.  A more detailed explanation of the tests may be found here.

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Singapore’s MAS consults on the mandatory clearing of OTC derivatives

Singapore’s MAS recently published a consultation on the mandatory clearing by banks in Singapore of vanilla interest rate swaps, to be introduced in mid 2016.  Here is a brief analysis of their consultation.  Their proposals are not controversial and will mostly affect the professional market who are very likely to be able to clear these contracts today.  The consultation also structures the rules to avoid any potential cross-border conflict with other regimes.  Interestingly they see a clear scope difference from their reporting requirement showing that market supervision and the management of systematic risk may naturally have different solutions.