Industry preps for life after Libor | Treasury investors cautious as debt-ceiling showdown nears | CVA proposal is too limited, dealers say
August 15, 2017
IACPM SmartBrief
Credit Markets
Industry preps for life after Libor
Regulators' timeline to replace the London Interbank Offered Rate with the Bank of England's Sterling Overnight Index Average rate may not be as untenable as it seems, as some work on the transition has already begun. London Stock Exchange's clearing unit has plans to extend its use of Sonia from short-dated swaps to longer-dated swaps covered by Libor, and a group that includes the top 16 dealers of swaps and additional derivatives is working on creating Sonia futures contracts. Changes are also already in the works for trillions of dollars of investments involving collateralized loan obligations.
Reuters (8/10),  Reuters (8/10) 
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Treasury investors cautious as debt-ceiling showdown nears
Investors drove up the costs of three-month Treasury bills to their highest level since 2008 at a recent sale as lawmakers face a deadline on the debt limit. The US has never defaulted on its debt and it is unlikely to do so, but after President Donald Trump said the government "needs a good 'shutdown,' " investors aren't taking chances.
Bloomberg (8/14) 
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CVA proposal is too limited, dealers say
Dealers have welcomed the European Banking Authority's move to make calculation of capital requirements for derivatives counterparty risk more flexible, but some say the proposal for establishing credit valuation adjustment cannot be applied in many cases. One dealer says the option is limited to cases in which none of the counterparty's peers has a credit spread, a scenario that does not apply to 75% of the dealer's clients.
Risk (subscription required) (8/10) 
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Fitch: Chinese business bankruptcies to soar
Bankruptcy filings by Chinese companies will accelerate this year as strengthened financial regulations take effect and the government lets more state-run "zombie companies" collapse, Fitch Ratings said. Data from the Supreme People's Court show insolvency cases spiked 54% in 2016 and are headed for another big increase this year.
South China Morning Post (Hong Kong) (8/10) 
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Rising euro could hamper ECB tightening plans
Euro appreciation could prompt the European Central Bank to slow its plans to tighten monetary policy, say BNP Paribas strategists, who expect the euro to reach $1.20 by late-2018.
Financial Times (tiered subscription model) (8/10) 
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Regulatory and Accounting Issues
SEC urged to clarify CLO risk-retention rules
Market participants want the Securities and Exchange Commission to end silence on risk-retention rules because of confusion about how they affect collateralized loan obligations. The rules, introduced as part of the Dodd-Frank Act, require CLO managers to hold some of the funds' risk, but questions have arisen, such as what happens to that retention once a CLO is sold.
Reuters (8/11) 
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Proxy risk factors create FRTB conundrum
The Basel Committee on Banking Supervision's Fundamental Review of the Trading Book allows use of modelable proxy risk factors in place of nonmodelable risk factors to reduce capital add-ons associated with the latter. However, such use might create a Catch-22 by cutting market-risk capital but increasing the possibility of model failure.
Risk (subscription required) (8/10) 
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US agencies press ahead to ease Dodd-Frank
Several US regulators are working on plans to ease Dodd-Frank Act restrictions -- including the Volcker rule -- put in place after the financial crisis. Industry groups prefer a full repeal rather than a rewrite of the rules.
MarketWatch (8/15),  The Wall Street Journal (tiered subscription model) (8/13) 
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EBA: Risky banks could pay higher deposit-guarantee fee
Guidance on how EU banks fund deposit guarantees might need to be revised to directly link the fee banks pay to their risk, said Slawek Kozdras, a policy expert at the European Banking Authority. "Perhaps there is a need to be more prescriptive as to how the raw indicators are translated into the elements of the formula," he said.
MLex (subscription required) (8/11) 
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EBA survey reveals lack of cohesion on fintech policy
A European Banking Authority survey reveals wide differences in the treatment of financial-technology firms among European countries, with as many as one-third of firms unsupervised by any regulatory regime. The survey concludes that lack of regulatory oversight requires further analysis and invites comments ahead of a public consultation.
Central Banking Publications (subscription required) (8/7),  Risk (subscription required) (8/8) 
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IACPM Annual Fall Conference, Nov. 7-8 in Philadelphia. Save the date!
IACPM's North American Conference brings together senior credit portfolio and risk professionals, regulators and other key practitioners to discuss the most important topics impacting our industry. Registration will open in mid-August. For additional information please visit IACPM's website.
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