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Where else can you get such useful insight into the OTC markets for free? Articles in Rocket 7 cover MiFID II Data Quality, Staying Ahead of Reporting Regulations, Concerns about Meeting the Bilateral Margin Regulations Deadlines, The Role of your OMS, Automated Documentation Tools, The ISDA Working Group on Uncleared Margin Regulations, All-to-All Trading, and more.
The PDF (downloadable) edition of Rocket is now available, including articles on ISDA Protocols, The Future of Trading, Indirect Clearing, Front and Back Loading, Anti-Abuse Legislation, MIFID Open Access, Portfolio Compression, The ISDA SIMM (Initial Margin) Model, Systems Transformation, Data Harmonisation for Trade Reporting, The Regulatory Reporting Mountain, Diversity in Banking, and a really useful piece from our Russian correspondant on Blockchain.
Interest rate markets have changed substantially since the financial crisis, both visibly and also less obviously in their market structure. These differences challenge asset management firms attempting to operate on behalf of their clients, especially in liability-driven investing (LDI), where the rules and market are continuing to change around them.
The disclosure of the leverage ratio in Basel III has put pressure on banks to improve their capital levels. In April 2015 Commerzbank announced raising €1.5 billion in capital to improve its leverage ratio to 3.9%. Deutsche Bank’s Co-CEO Anshu Jain said that that the bank’s single most important strategy was to increase the leverage ratio from 3.4% to 5%. This article explains how compressions can also help banks to increase the leverage ratio while reducing their operational and credit risk.
The financial system is shifting towards greater use of collateral to mitigate counterparty credit risk. On a systemic basis, this is reducing credit risk; however it is creating new market and liquidity risk on the collateral held, potentially resulting in weak points in the resilience of the financial system
With adjustments to Basel III nearing completion, it's not clear whether client clearing ROE can be rendered sustainable by clearing fee increases alone. Here I look at a way to reduce capital burdens of bank clearing members by eliminating client-driven exposures whilst keeping banks providing client clearing - the Pure Agency client clearing model.
With regard to systemic counterparty risk reduction the bank regulators' minimum capital, liquidity reserve and margin levels are a major incentive. The current fine-tuning debate and regulatory rule adjustment are understandable given the financial implications.
By contrast the lack of discussion of clearing mandates might imply they are a straight systemic counterparty risk win through promotion of consolidation, netting and margining in CCP facing portfolios. Unfortunately it is not that simple - clearing mandates also entrenching bilateral counterparty risk by limiting key risk reduction techniques.
Here I explore these limitations and suggest some solutions.