Buyers of Chinese corporate bonds must deploy the usual tools of credit analysis: earnings ratios, debt levels, cashflow, and more. But there is a powerful factor that can outweigh all others: state support.

Putting a value on state support is a thorny business, and experts believe China’s burgeoning bond market is littered with mispriced credits ready to trap the unwary investor.

“The problem in the Chinese credit market is that there are a lot of different bonds out there that are all

In the aftermath of the 2008 financial crisis, when regulators were in the early days of beefing up their annual stress-testing regimes, a row broke out between one country’s central bank and its prudential supervisory arm about the severity of the worst-case scenario.

The central bank’s economists were pushing the regulator to soften its outlook. The country was already mired in its deepest post-war recession, they argued – surely things couldn’t get any worse.

Reluctant to call the bottom of

Credit risk capital rules need to change in light of the shift to the Current Expected Credit Loss accounting standard, which entails earlier recognition of potential loan losses, say bankers and academics.

CECL, which took effect on January 1, requires lenders to set aside enough reserves to cover expected losses over the entire lifetime of a loan, from the point of origination. The 22 largest US banks booked $42.5 billion in credit loss provisions in the first quarter, three-and-a-half times

Clients of cloud service providers (CSPs) such as Amazon Web Services and Microsoft Azure will have to negotiate contract terms that allow them to supervise the providers’ performance and carry out detailed audits under regulatory guidelines currently out for consultation.

The European Securities and Markets Authority’s (Esma) draft guidelines on cloud outsourcing, published on June 3, map how financial firms and regulators will have to monitor and audit cloud providers. Service providers would

Jump to In focus: Covid scenarios | Spotlight: JP crypto suit

In May’s largest operational risk loss, Morgan Stanley must pay up to €42 million ($46.8 million) to Dutch tax authorities over alleged cum-ex dividend trades in the 2007/2008 financial year. In such cases, equity transactions are structured so that multiple parties are eligible for a rebate on capital gains tax that only one party has paid.

The Amsterdam Tax and Customs Administration (the Belastingdienst) launched an investigation

Rate cuts and bond-buying by the Federal Reserve might have insulated the global economy from the worst impacts of the coronavirus – but it’s done little to help the business model of futures commission merchants. Compressed rates around the world are putting the squeeze on clearing firms, as the dollars they deposit at central counterparties start to earn negative rates, prompting many to talk openly of a fundamental revaluation of the economics of clearing.

“If you don’t want to lose heaps of

By September 26, the still-spreading coronavirus will have extracted a heavy toll from the US economy, and triggered a catastrophic collapse in demand for US assets. The dollar will have lost 20.25% against the euro and 25.5% against the yen; the S&P 500 will plunge by a third. Meanwhile, the 10-year US Treasury will be yielding 0.1%.

It’s a bleak, bruising scenario – it may not seem very likely today – but that’s precisely the point.

The scenario is one of 64 derived from a survey of more

By September 26, the still-spreading coronavirus will have extracted a heavy toll from the US economy, and triggered a catastrophic collapse in demand for US assets. The dollar will have lost 20.25% against the euro and 25.5% against the yen; the S&P 500 will plunge by a third. Meanwhile, the 10-year US Treasury will be yielding 0.1%.

It’s a bleak, bruising scenario – it may not seem very likely today – but that’s precisely the point.

The scenario is one of 64 derived from a survey of more

Faulty data led Wells Fargo to overstate its operational risk capital charge for the fourth quarter of 2019 by $5.2 billion, raising further questions on the soundness of the bank’s op risk management.

In its regulatory filing for the first quarter, the San Francisco-based lender revised its op risk-weighted assets (RWAs) amount as of Q4 2019 to $338.7 billion. The previous filing  had pegged the amount at $403.6 billion, 19% higher. Minimum regulatory capital charges are set at 8% of RWAs

Like millions of others, finance professionals have been working from home since March. It hasn’t been easy. For some, the workload is greater than ever as recent volatility in markets has hiked the number of trades to execute and process. But restrictive home office set-ups and patchy internet connections mean simple tasks can take longer to complete. Virtual meetings help workers stay in touch but it’s not the same as office camaraderie.

HR teams at financial firms are assessing the demands

Supply chain risk can go both ways. Conventionally, it is the risk that suppliers can pose to a company and its investors. But a new study shows unexpected market risk and volatility can spread to suppliers from major customers, especially in an economic downturn. And, while the findings are derived from historic data, they have lessons for the current climate.

Poor performance and increased volatility betray stress in a traded company. But these will also spread to suppliers, creating similar

COMMENTARY: Polluter pays

There’s a strong argument for delaying all regulatory action while the pandemic continues. Indeed, the long-drawn-out transition away from Libor to other benchmark rates has been delayed still further (alhough this hasn’t calmed fears about its effect on the structured products market).

The problem, though, is that pushing needed changes further into the future is a dangerous habit to get into.

This week, Risk.net looked at the latest moves in climate regulation – the European Central Bank’s progress toward including climate risk in capital requirements calculations and the spread of an open-source standard on accounting for climate emissions (the Network for Greening the Financial System also published its guide for supervisors, with more detail on how financial regulators could proceed). 

The ECB’s plan is leisurely. At the earliest, incorporating climate risk into Pillar 1 capital requirements won’t happen...

Last week, Eurex Clearing finalised some long-awaited tweaks to its policy governing margin add-ons for outsized positions in fixed income futures. The bourse dutifully consulted its members before making the changes: what sounds like an arcane rule has major risk management implications for clearing brokers and their clients.

What Eurex probably didn’t expect was the ferocious disagreement that erupted among clearing firms after it put the proposal out to consultation.

The bourse sought

It started, appropriately enough, on a train to Paris.

A group of Dutch regional bank executives were travelling to the French capital in 2015, when the conversation turned to how each lender accounts for the carbon emissions it finances.

“That’s where we had the idea to create an open-source carbon accounting standard,” says Freek Geurts, impact adviser at ASN Bank.

The splashy commitments banks make to combat climate change count for little without a credible methodology for measuring and

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Newly released regulatory filings show Ronin Capital’s balance sheet ballooned by almost two thirds to $34 billion at the end of 2019. Less than three months later, CME Group auctioned off the prop firm’s derivatives portfolios after determining it could no longer meet the bourse’s minimum capital requirements.  

A Risk.net analysis of Ronin’s filings with the US Securities and Exchange Commission since 2002 indicates it dramatically expanded its trading activity last year. The firm reported

As governments move to ease the lockdowns put in place to slow the spread of the coronavirus, the financial blow to businesses is coming into sharper focus. The latest Credit Benchmark data for April 2020 reveals sharp deteriorations across a swath of industries.  

Oil and gas companies were the worst hit, with 92% of credit movement in April to the downside. The sector faces severe challenges.

The price of West Texas Intermediate crude dropped from $47 a barrel (/bbl) at the start of March to well below $20/bbl in April. While prices had recovered to $31/bbl as of March 18, that’s still less than the $37/bbl to $45/bbl average breakeven cost for the 6,000 or so shale producers in the US.

Analysts at Mizuho Securities estimate 70% of these companies could be forced into bankruptcy before the cycle turns.  

Commodity companies in the basic materials sector also saw their outlook darken, with 87% seeing credit deterioration....

Earlier this month, the Financial Stability Board published proposed guidance directing national authorities in resolving central counterparty clearing houses (CCPs) in the event of a CCP failure. Specifically, it has called for CCP shareholders to be exclusively responsible for absorbing all losses in a resolution scenario. I believe that is the wrong call, and the wrong time to make it.

As former chairman of the US Commodity Futures Trading Commission, who led the process of refining recovery

COMMENTARY: The unhappy return

By March, it was too late. Decisions taken in January and February by governments around the world had already determined whether their countries would see a few hundred deaths or tens of thousands over the next three months.

March was the month when the financial sector, along with everyone else, was forced to deal with the pandemic as it worsened from day to day. Problems of all kinds broke out. This week, Risk.net looked at the spike in failed repo and securities lending trades, now leading to calls for delays to the European Union’s new settlement discipline rules, and blamed at least in part on the pressures of transitioning to lockdown and remote working. Risk.net also examined the drawdown of capital to support lending – and the concern that in the process capital standards might become divorced from reality.

Now it is May, and in most of the hardest-hit countries, the epidemic has passed its peak,...

In April’s largest loss, Industrial Bank of Korea (IBK) paid a total of $86 million for failures in its anti-money laundering programmes, which allowed the illegal transfer of over $1bn to Iran through its New York branch.

Investigations by the New York Attorney General’s Office (NYAG) and the New York State Department of Financial Services (NYDFS) found severe deficiencies in IBKNY’s AML controls. From at least 2006 to January 2013, IBKNY’s process for reviewing transactions was manual; it had

Smaller banks are being forced to put their Libor transition preparations on hold amid a coronavirus-induced resource crunch, larger dealers are warning – throwing into jeopardy regulators’ plans to have the whole market migrate to new risk-free reference rates from the end of next year.

While larger banks have dedicated transition teams, smaller firms are being forced to divert resources during ongoing market panics and a massive uptick in emergency lending – meaning they face a challenging

Two quants use options pricing tools to model Covid-19

New tool aims to gauge wider cost of virus control measures

Banks race to adapt AML systems for the coronavirus age

Lenders expect regulatory lashing if controls fail to keep pace with changes in criminal behaviour

Alt risk premia chasing ‘tail beta’ – again

Quant strategies that failed in the coronavirus crash face a reckoning

COMMENTARY: Survival skills      

The macroeconomic picture is not good. Bank of England forecasts issued this week predict a 14% contraction in the UK economy in 2020. Though few other countries have seen as many deaths from the pandemic as the UK, the economic damage is the result of precautions, not the virus itself, and contractions on a similar scale are likely elsewhere.

It’s the worst recession since 1706, according to the central bank’s records, when the costly and destructive War of the...

Patterns of fraudulent activity have changed markedly during the global coronavirus lockdown, but banks don’t expect much sympathy from regulators if their detection systems are found wanting as a result.

“They do recognise that there are challenges, but I would struggle to think of an argument that I could use to the Financial Conduct Authority (FCA) that I wasn’t able to validate my new risk assessment model just because of Covid-19,” says Richard Snookes, chief compliance officer at Sberbank