Financial InterGroup Companies

Basel Trading Book Response

admin — Fri, 14 Sep 2012 19:08:15 +0000

In July 2009 the Basel Committee issued revisions to the market risk framework. At the same
time, the Committee initiated a fundamental review of the trading book. 1 We understand
that the review’s intent is to comprehensively evaluate the overall design of the market risk
amendment of 2004 and the update of 2009 including an assessment of identified weaknesses
in the risk quantification techniques adopted within Basel’s internal models-based and
standardized approaches. The resulting document, the subject of the comments included in this
paper, proposes extensions to the existing framework which, in our view, did not constitute
the “fundamental review” announced by its authors.

The ten (10) summary questions prospective commenters were invited to consider concluded
with, “Do commenters propose any amendments to these approaches?” We believe a more
appropriate question would be to ask commenters whether they wish to propose any “alternative”
approaches. In other words, the fundamental review should be considerate of proposed
alternative risk quantification techniques given the limitations and inadequacies inherent in
the prevailing market risk framework as evidenced by the Basel authors’ own conclusions
and observations. For example, the review document includes references such as “flaws in the
overall design of the framework”, “both the models-based and the standardized approaches
proved wanting”, “the models-based capital framework for market risk relied on a bank-specific
perspective of risk, which might not be adequate from the perspective of the banking system as
a whole”, “reviewers also identified important shortcomings with the standardized approach”
and “a lack of risk sensitivity, a very limited recognition of hedging and diversification benefits
and an inability to sufficiently capture risks associated with more complex instruments”. Most
importantly, the document observes that weaknesses identified in the prevailing capital adequacy
regime constituted a “provision of incentives for banks to take on tail risk” which is contrary to
the very essence of a capital adequacy framework.

Click here to view the entire document.

The LEI, the CICI, and Progress on the Global identification of Swaps and Futures Market Participants

admin — Mon, 03 Sep 2012 19:17:33 +0000

Allan Grody says that LEI will allow for more sophisticated risk surveillance.

What do railroad tracks, bar codes and the World Wide Web have in common with a LEI? They are all standards – physical world standards in the case of both the width of rail road tracks and the unique product identifiers in bar codes. They make transportation and global commerce work. The World Wide Web and the LEI (Legal Entity Identifier) are information age standards – the former allows global access to billions of web pages on the Internet and the latter is being prepared for global access to billions of financial transactions.

The LEI is at the beginning of a long chain of regulatory initiatives to monitor financial institutions through the transactions they engage in and the risk exposures they engender. The very first pillar of global financial reform is a standard for an automated coding scheme for identifying the same financial market participant to each regulator in the same way. The G20’s Financial Stability Board (FSB), an entity with a broad charter to risk adjust the financial system, has begun laying the foundation for such a regulatory capability.

Bring Back Glass-Steagall? Which Version?

admin — Thu, 16 Aug 2012 19:19:13 +0000

Restoring Glass-Stegall would be “a palliative just like the Volcker rule: simple to say, hard to do,” says consultant Allan Grody. Even under the 1933 law, he notes, financial innovators blurred the lines between commercial and investment banking – almost from the very start.

Click from examples from Grody’s forthcoming book, Reengineering the Financial Corporation

Don’t Break Up Megabanks, Re-Engineer Them

admin — Wed, 01 Aug 2012 19:23:59 +0000

Dismantling a huge building is pretty easy – you reverse-engineer the architect’s blueprints.

Executing a will is also simple – just follow the grantor’s wishes to disburse the documented assets.

However, executing a too-big-to-fail bank’s “living will” is not a practical recipe for resolving such an institution’s troubles. Besides, there are more productive ways of risk adjusting the TBTFs – reengineer them.

After all, shouldn’t we want to preserve the benefits of being big, global and diversified if society can manage their risk exposures and support their stabilizing effects on economic order?

Read more

CFTC Choice for LEI Process Too Random: Expert

admin — Tue, 24 Jul 2012 19:26:53 +0000

So, the Commodity Futures Trading Commission has spoken on the subject of creating legal entity identifiers, choosing the alliance of the Depository Trust and Clearing Corporation and the Society for Worldwide Financial Telecommunication to register and maintain a system of identifying all parties to swaps transactions under its supervision.

Read more

Commentary: Legal-entity identifiers will improve system

admin — Thu, 14 Jun 2012 16:44:43 +0000

Allan Grody on why the LEI initative should be welcomed as a measure to increase transparency.

Capital and collateral may be the metric that supports solvency in both our financial institutions and our clearing houses but seeing what is happening proactively as transactions are conducted is what regulators believe will be the means of truly overseeing the financial system. That first step on the road to transparency seems to be close at hand with the final recommendations for putting forward a global legal entity identification regime set to go before the G20 later this month.

Grody: Transparency is coming to derivatives

admin — Wed, 13 Jun 2012 19:28:19 +0000

Allan Grody on why the LEI initative should be welcomed as a measure to increase transparency.

Finality and the Legal Entity Identifier

admin — Thu, 31 May 2012 15:24:13 +0000

At the May 22 hearings of U.S. Senate Banking Committee on swaps regulation, both Securities and Exchange Commission Chairman Mary Schapiro and Commodity Futures Trading Commission Chairman Gary Gensler where asked when and how they became aware of JPMorgan Chase’s hedging difficulties.

Their answers: They each heard it first through the media.

The financial crisis (and subsequent events such as this) keep providing prima facie evidence that regulators do not have the tools to see into risks being taken on by the financial institutions they are charged with overseeing.

But there is hope that a global initiative known as the legal entity identifier (LEI) project will.

At the hearings, New York Senator Charles Schumer asked Chairman Gensler about whether the risks will be clearer – more transparent – once a system for clearly identifying all participants in financial transactions and their parent companies is in place.

Specifically, the LEI system.

Global Transaction Coding Would Have Flagged the JPMorgan Problem

admin — Fri, 25 May 2012 16:48:01 +0000

If we had a legal entity identifier in place could we have seen the problem building up? The short answer is yes.

At this week’s U.S. Senate Banking Committee hearings on Swaps regulation both SEC Chairman Schapiro and CFTC Chairman Gensler were asked when and how they became aware of JPMorgan Chase’s (JPM) hedging difficulties. They both answered they first heard about it through the media. Revelations from the financial crisis taught us that regulators did not have the tools to see into the financial institutions they were charged with overseeing. Obviously we haven’t fixed that problem yet. But there is hope that a global initiative known as the legal entity identifier project will.

The LEI is at the beginning of a long chain of regulatory initiatives to monitor financial institutions through the transactions they engage in and the risk exposures they engender. The very first pillar of global financial reform is a standard for an automated coding scheme for identifying the same financial market participant to each regulator in the same way. Getting agreement on a globally unique and standardized legal entity identifier is the first test of putting this computerized all-knowing-all seeing-capability in place. The G20’s Financial Stability Board, an entity with a broad charter to risk adjust the financial system has begun laying the foundation for such a regulatory capability.

IDs on Overdrive

admin — Fri, 25 May 2012 16:42:12 +0000

Roughly 22 years ago, the proliferation of fax machines and personal computers led to an unexpected development. The nation started running out of area codes. New York had to adopt … a third.

Then came the mobile phone and, by 2009, we were running out of area codes again.

But computers of all types – from servers to smart handheld devices – kept proliferating, too. And every device came to be connected, one way or another, to the World Wide Web.

So, by 2010, Internet addresses were running out.

Now comes the address system for financial markets: the legal entity identification code.

Thankfully, this time, it looks like there is plenty of room to grow.