Monday, January 29,
2018 09.53AM / By Kelvin To, Founder & President Of Data Boiler
Central bankers around the world
shifted priorities in a last minute notice. They postponed
deadlines for FRTB revised market risk framework, CVA, IRB, operational risk
SMA and others to 2022 and beyond.
I have mixed feeling about this
because they are rightfully suspicious about the usefulness of risk
models or any central risk book. Irony is – risks are likely to be
heightened to an unprecedented level in 2018.
Let’s plan ahead for 2018’s “irrational
exuberance” factors in a sarcastic manner. Who knows, my “sarcasm” may
indeed be the best precaution against the next financial crisis!
1: US Tax Reform and Delaying Rate Hikes
When you catch a windfall from
government giving corporates a huge tax break, who cares about innovations (see
This tax reform bill should keep corporates a few good months to optimize tax
savings and celebrate. Hence, it distracts them from doing anything stupid,
like – premature launch of overly innovative products that the underlying risks
are unknown. Nevertheless, rate hikes may be delayed or less than 3 in 2018
The ball is at government’s court (not the industry) to prevent the next
2: Deferrals and Light-touch on Financial Regulations
Many provisions of MiFID II in Europe
are delayed because of non-synchronization of global standards and other
nuances (see this).
In the US, regulators appointed by President Trump are likely to have
light-touch on financial rules. That being said, financial institutions have
less to “tweak” their risk models, hence less mistakes. As long as they aren’t
“optimizing” their central risk books to hide losses (see this),
it is fine for banks to do shares buyback (rather than anything too risky, like
lending) amid reduce regulatory burden.
3: Modernize Fixed Income Market Structure
The SEC recently setup a fixed income
market structure advisory committee (see this)
in hope to revitalize the debt market. Likely, the committee would recommend
acceleration of market digitization to boost growth (see this).
Thankfully, they aren’t going to seek credit enhancement for some of the
illiquid “junks” (take heed of lessons from subprime MBS/ CLO, but side effects
of over securitization has yet to be addressed). There may be some costs to
modernize market infrastructure, but it’ll eliminate human lapses and won’t
dampen financial stability.
4: Big is Good, Small needs Better Protection
“Too big to fail” concerns have placed
on backburner. Big indeed means “stable genius” to cleverly lobby for reliefs
To prevent the big from being “overly clever” to take advantage over the small
investors, regulators are going to scrutinize brokers/ dealers and advisors on
abusive practices. Also, they will hunt-down lone day-trader who walks on grey
line. Besides, small investors will be bar from participating in “exotic”
products (like Bitcoin Futures), or they’ll be require to maintain a higher
margin (see this).
In short, fruits are for the big guys, those who don’t have size, speed, and
power to negotiate favorable treatment can take the leftover.
5: Cybersecurity Policy and Procedures
Even though various cybersecurity
standards (ISO, NIST, NATO, ITU, etc.) are widely available (see this),
regulators still like to see these scripts written into policy and procedures.
Would people sleep better with box files? Or anyone actually looks into
data-in-motion, at rest, in use or reuse, repurpose, and recycle to make sure
nothing meaningful could be stolen (see this)?
Well, may be data breach happens often enough that the media would ultimately
become too tied to report another occurrence.
Chill out, the market is not going to
collapse this year. Besides, “planning” is a socially accepted form of
procrastination. It takes time to fine-tune models and ready the data for
central risk book. The industry will get to the desire stage soon (note: no mentioning
of preventing market-timing/ financial engineering abuses). We can pretend
there is no danger in market assuming a crisis will not happen “by my watch”,
or else IBG/ YBG.
1. Exposure of Proposed New
Rules on Direct Cash Settlement and Sundry Amendments
2. UK Launches New
Anti-Money Laundering Watchdog To Strengthen Defences Against Terrorist
3. SEC Extends Free
E-Dividend Registration Till February 28, 2018
4. The Current State of
Shareholder Engagement, Including The Roles of Institutional and Activist
5. Early Observations On
Improving The Effectiveness Of Post-Crisis Regulation
6. FINRA Releases 2018
Regulatory And Exam Priorities
7. CBN to Sanction Erring
Banks for Infractions of Payments System Rules and Regulations
8. E-dividend Registration
to Continue – SEC Nigeria
9. NSE Calls for Comments
and Drafting of Rules on the Derivatives Market
10. SEC, IST partner to curb
11. CBN Suspends Extension of
Settlement Banking Arrangement to All the Clearing Sessions