Over-the-Counter Liquidity Options for Community Banks

From Bank Director

Dr. Doom: This 'time bomb' will trigger next financial collapse

From CNN Money –

“Nouriel Roubini, who has been dubbed "Dr. Doom" for his dark predictions, warned in an Op-Ed in The Guardian on Monday about the existence of a "liquidity time bomb" that he fears will eventually "trigger a bust and a collapse."

The New York University economist joins a growing number of observers who are worried about the issue. Liquidity is the lifeblood of financial markets. It measures how easy it is for investors to quickly sell stocks and bonds. When investors get fearful but can't sell their stocks, it causes even more panic.”

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High-frequency trading might reduce liquidity, not boost it as its defenders claim

From The Economist
“In the wake of the publication earlier this year of “Flash Boys”, a book that criticised high-frequency trading (HFT)—the use of algorithms to buy and sell shares and other financial assets at vanishingly short intervals—regulators and investors have been debating whether and how to curb it. One mooted response is to introduce deliberate delays before trades are executed. Another is to shuffle the order in which they are processed. HFT firms maintain that no change is needed, on the grounds that they help to lubricate markets by increasing volumes and ironing out inconsistencies in prices. But a recent paper argues that they do indeed create inefficiencies and suggests a more fundamental reform to how markets operate in order to stave them off.

“Flash Boys” took HFT firms to task for a strategy called front-running. When an investor is buying or selling a big block of shares, it is common to split the order across multiple exchanges (say, the NASDAQ and the NYSE) in search of a better overall price. HFT algorithms can observe the order on one exchange and “front-run” the investor to the next one, buying up the available stock there and selling it to the sluggish investor at a higher price.”

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Basel III – A 10 minute view for non specialists

BNP Paribas Fortis presents this 10 minutes animation on Basel III for non-specialists.

This video includes changes made by the Basel Committee in January 2013. 

LIBOR – What it is and is it broken?

The London Interbank Offered Rate (LIBOR) has been a key financial benchmark for decades. It is one of the most important reference points of the global financial system.

LIBOR is the average interest rate that leading banks in London charge when lending to other banks. Banks borrow money for one day, one month, two months, six months, one year, etc., and they pay interest to their lenders based on certain rates. The Libor figure is an average of these rates.

Many financial institutions, mortgage lenders and credit card agencies track the rate, which is produced daily at 11 a.m. to fix their own interest rates which are typically higher than the Libor rate. As such, it is a benchmark for finance all around the world.

At the height of the financial crisis allegations emerged that the LIBOR calculation was not really all above board. These allegations have persisted and LIBOR is currently at the heart of a sprawling regulatory investigation into possible manipulation.

Learn more about LIBOR and the current investigation from the London Financial Times. Watch the VIDEO HERE.

Basel III misses opportunity to break down the silo culture in banking – Algorithmics assessment

Algorithmics, the world's leading provider of risk solutions, has published a comprehensive assessment of all the elements of Basel III, and finds them lacking in their conceptual approach to capital and liquidity. In it Algorithmics questions the missing link between capital and liquidity

The raft of proposals from the Basel Committee includes the headline-grabbing tier 1 capital ratio, buffer building, and leverage and liquidity ratios, which are all significant in their own right. However, having assessed all the regulatory documents from a holistic rather than risk silo perspective, Algorithmics’ research paper, titled ‘Basel III: What’s New? – Business and Technological Challenges’, identifies what they claim is a fundamental flaw of failing to reflect the true relationship between liquidity and capital.

One of the report’s authors, Dr Mario Onorato, Head of Balance Sheet & Capital Management at Algorithmics, and Honorary Senior Lecturer, Cass Business School in London, says, “Continuing to view capital as a primary mitigant of liquidity risk fails to recognise the complete nature of liquidity risk. Should a liquidity situation arise and the bank uses reserves set aside to absorb losses and meet obligations, the value of the company and of the capital are also likely to decline, because the bank will begin to be perceived as ‘riskier’. Liquidity risk and capital are therefore inextricably linked and cannot be addressed as separate silos.”

Basel III goes only part way to addressing the weaknesses of the established silo-based approach to risk management. The compartmentalized, prescriptive nature of the liquidity coverage ratio and net stable funding ratio within Basel III is unhelpful because it does not reflect the capital-liquidity interplay. This summer’s European Bank stress tests did not touch on liquidity, the very thing that crippled the markets during the recent crisis. The avoidance of a repeat occurrence is a key Basel III objective.

Regardless of regulatory gaps, Dr Onorato suggests stakeholders’ demands for better governance will result in banks amending their risk processes and systems in order to view risk holistically for all their legal entities, from both a bottom up and top down perspective.

“A truly effective risk management system will take a holistic approach to risk measurement and reporting; viewing and managing the interconnections between all risk factors, such that their potential impact on the balance sheet and stakeholders’ interests can be properly accounted for.” says Dr Onorato

To download a copy of this Algorithmics' Basel III research paper visit: http://www.algorithmics.com/EN/media/pdfs/Algo-WP0910-LR-Basel3-Exd.pdf

CPSS-IOSCO Review of Standards for Payment, Clearing and Settlement Systems

The Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) have launched a comprehensive review of their existing standards for financial market infrastructures such as payment systems, securities settlement systems and central counterparties.

There are currently three sets of standards involved, namely:
• the 2001 Core principles for systemically important payment systems
• the 2001/2 Recommendations for securities settlement systems
• the 2004 Recommendations for central counterparties.

Financial market infrastructures generally performed well during the recent financial crisis, and did much to help prevent the crisis becoming even more serious than it actually was. Nevertheless, the committees believe that there are lessons to be learned from the crisis and, indeed, from the experience of more normal operation in the years that have passed since the standards were originally issued. It thus seems timely to review the standards with a view to strengthening them where appropriate.

Robust financial market infrastructures make an essential contribution to financial stability by reducing what could otherwise be a major source of systemic risk. Moreover, insofar as they enable settlement to take place without significant counterparty risk, they also help markets to remain liquid even during times of financial stress.

The review will be led by representatives of the central banks that are members of the CPSS and those of the securities regulators that are members of the IOSCO Technical Committee. The International Monetary Fund and the World Bank are also participating in the review. The review is part of the Financial Stability Board's work to reduce the risks that arise from interconnectedness in the financial system.

The committees will coordinate with other relevant authorities and communicate with the industry, as appropriate, as the work progresses. They aim to issue a draft of all the revised standards for public consultation by early 2011.

Separately, as announced in the press release on 20 July 2009, the CPSS and the Technical Committee of IOSCO are already in the process of providing guidance on how the 2004 Recommendations for central counterparties should be applied to CCPs handling OTC derivatives. The guidance will also cover other relevant infrastructures handling OTC derivatives such as trade repositories. This aspect of the work has been put on a fast track because of the new CCPs for OTC derivatives and trade repositories that have recently started, or are about to start, operating.
A consultative document on the guidance will be issued within the next few months. This new guidance will not entail amendments to the existing recommendations for CCPsbut will of course be incorporated into the general review of the standards that has now begun.

The Committee on Payment and Settlement Systems (CPSS) serves as a forum for central banks to monitor and analyse developments in payment and settlement infrastructures and set standards for them. Its members are central banks from 24 countries and regions. The chairman of the CPSS is William C Dudley, President of the Federal Reserve Bank of New York. The CPSS secretariat is hosted by the BIS. More information about the CPSS, and all its publications, can be found on the BIS website at www.bis.org/cpss .

The International Organization of Securities Commissions (IOSCO) is a policy forum for securities regulators. The organisation’s membership regulates more than 95% of the world’s securities markets in over 100 jurisdictions. The Technical Committee is a specialised working group established by IOSCO’s Executive Committee and is made up of 18 agencies that regulate some of the world’s larger, more developed and internationalized markets. Its objective is to review major regulatory issues related to international securities and futures transactions and to coordinate practical responses to these issues. Kathleen Casey, a Commissioner of the US Securities and Exchange Commission, is the chair of the committee. More information about the Technical Committee can be found at www.iosco.org/ .

The review will be co-chaired by the chairs of the CPSS and the IOSCO Technical Committee, ie William C Dudley and Kathleen Casey.