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October 2018 News Update

We have selected October's most relevant news within the fields of digital advice and balance sheet risk. To summarise, the global wealth management industry carries on expanding its offerings with automated financial advice solutions, while the end-customers become more price-sensitive and easily engaged into managing their funds themselves. On the balance sheet risk side, the industry continues to refine its compliance and operational practices in regards to MiFID II. Moreover, the large players are actively engaged in discussing the complexities of the upcoming implementation of FRTB. Last but not least, the regulators continue their work on defining means to mitigate cyber risks faced by rapidly digitalising financial industry.

| MiFID II | Basel | FinTech | RegTech | Regulations | Risk | Cyber

September 2018 News Update

We have gathered the most exciting highlights from the digital advice innovation landscape as well as the latest news related to balance sheet risk. Overall, the news indicates positive ground for the growth of automatic financial advisers although the industry has been surprised by the large player's withdrawal from the emerging digital advice offering. On the balance sheet risk side, cyber risk is gaining prominence as an operational risk, while the IFRS 17 is increasingly viewed as a catalyst for business model innovation for the insurers. Additionally, the use of machine learning is penetrating accounting industry, though it is not expected to cause disruption in terms of massive unemployment.

| Cyber | RegTech | FinTech | Operational Risk | Regulations

Redesign and Reuse: Gauging the Non-Modellable Risks under FRTB

The set of Basel III rules finalized the development of the regulatory capital framework’s post-crisis reforms, accompanied by an industry's lobby battle. However, there is an element of the newly developed FRTB regime, which carries on keeping the industry leaders awake during the nights: the new approach to treating the non-modellable risk factors (NMRFs). This topic is gaining prominence both due to the knotty nature of these risks and because 29% of total market risk capital charges under FRTB could be attributable to NMRFs. However, we argue that despite the differences in the treatment of hard-to-model risks, the existing framework could still be put to use while addressing the new FRTB requirements.

Basel | Modelling | Risk | Regulations | RegTech | Model

The Automated Future of the Wealth Management Industry

Drastic changes in regulations governing the wealth management industry promise to alter the way these businesses operate. While the regulators are dedicated to make the private banking industry more transparent, stable, reliable and customer-centric, the industry is challenged to look for innovative solutions to keep the margins at sustainable levels. A half-day conference organized by Kidbrooke Advisory, Ortec Finance and Microsoft that took place in Stockholm on April, 19th 2018 featured a panel discussion among the most prominent wealth management industry professionals. The industry leaders shared their vision of the current challenges within the sector as well as their opinions on the future of automated financial advisories.

RegTech | FinTech | Regulations

The Dark Side of Digitalisation: Addressing Cyber Risks

The minimal criterion of success is an absence of failure. However, when it comes to information security breaches, it is safe to claim that this criterion is far from being met. A few prominent scandals in recent years demonstrate the scope and impact of such risks on the financial industry, influencing the EIOPA to include a cyber security questionnaire in its Cyber Risk Assessment Package. Gauging cyber risk is a challenging endeavour, marked by the sensitive character of the underlying data and a lack of established academic research within the field. However, Kidbrooke Advisory has formulated its take on the cyber risk assessment.

Cyber | Risk | Operational Risk | Regulations

Do No Harm: The European Commission Action Plan Urges Financial Advisors to Go Green

Corporate sustainability and responsibility has historically been regarded as a controversial topic both among the academic world and practicing professionals. As early as in 1970, the free market advocate Milton Friedman put forward a view that any sustainability-related actions are likely to destroy shareholder value. Nowadays, the reality of rapid depletion of resources as well as accelerating global warming drives the regulators to promote an opposite view of the sustainability impact on enterprise value.

Regulations | Risk | MiFID II

Balancing Innovation: Use Both Hands in Establishing Robotic Advice!

In the wake of rapid technological advancements and looming regulatory challenges, large players of the British financial industry turn to innovation as a tool to preserve the margins high and keep the customers satisfied. However, the extent to which the multinational giants commit to letting their new offerings cannibalize their traditional businesses varies dramatically.

FinTech | Modelling | Operational Risk | Management Action

Mitigating Risk: A Joint Model for High-Yield and Investment-Grade Credit Indices

Today, there are many flawed corporate bond pricing models. However, there is also a novel credit-spread approach that can simulate index prices and accurately capture probability of default, enabling better risk management and regulatory compliance.

Modelling | Solvency II | MiFID II | Basel | Risk | Volatility | Dependence

MiFID II: Are the ETFs the way to go?

MiFID II creates a downward pressure on the conventional investment companies’ margins and influences them to either turn to ETFs as a low-cost solution or take on a full-scale digital transformation of the business. However, there are some pitfalls on the ETF direction side.

MiFID II | Regulations | Risk | Operational Risk | Management Action

Stress tests for assessment of the capital planning buffer

Sweden's financial supervisory authority, Finansinspektionen (FI), use a stress testing method for the assessment of the capital planning buffer, reflecting how a firm is affected by a severe but plausible financial stress. The fundamental parts of the method is to be constant over time, while, however, a re-evaluation of the risk factor calibration is done on a yearly basis. FI recently released this years memorandum and the main changes from 2016 are...

Basel | Regulations

A parametric approach to haircut modelling

Determining collateralised derivatives haircuts is becoming an increasingly more important problem. At the same time, the method used today has been found to have significant shortcomings. To sidestep these issues industry is now looking towards a parametric modelling approach to determining haircuts.

Risk | Modelling | VaR | Volatility

Machine learning: A regulatory concern?

With the rapid adoption of artificial intelligence in the financial sector, banks are looking towards machine learning to stay regulatory compliant.

Regulations | Risk

Is CVA calculations a motivated tool when pricing derivatives?

In the latest issue of magazine, esteemed professors Rama Cont and Riccardo Rebonato took part in a panel discussion where they questioned the legitimacy of using credit value adjustment (CVA) when pricing derivatives.

CVA | Risk

New proposals regarding the rights of pension savings movement

By exercising the rights of moving pension savings, consumers can benefit in a better overview of their pension savings. Unfortunately, movement of pension savings are often subject to high fees and taxation which makes it less attractive. To change this, the Swedish Ministry of Finance has presented a series of law amending propositions to improve for consumers to exercise their rights to move pension savings.

SCR | Solvency II

Differences in the implementation of the countercyclical capital buffer policy

The countercyclical capital buffer (CCyB) – a part of Basel III – has the purpose of ensuring that banking capital requirements consider the macro-financial environment, giving protection during periods of excess aggregate credit growth. In a recent document from the Basel Committee on Banking Supervision, the committee points out that even though the CCyB policy contains some key requirements, jurisdictions have had and still have a significant flexibility in designing their national CCyB policy framework.

Basel | Regulations

The Modelling of Macroprudential Policies

The usage of macroprudential policies has become an important tool in the development of financial regulations and the mitigation of procyclicality of the financial system. Although the usage of macroprudential tools is considered a positive development, the principles behind its strategies is still being explored.

Regulations | Modelling

The Past, Present and Future of Central Bank Balance Sheets

In a recent interesting post on the Bank Underground a blog where Bank of England staff can share their views James Barker, David Bholat and Ryland Thomas write about the past, present and future of central bank balance sheets.

Risk | Regulations

New capital requirements for Swedish occupational pension funds

As is known, the European Commission excluded new capital requirements within the new regulation IORP II. However, Sweden’s financial supervisory authority, Finansinspektionen (FI), have been imposed to leave a suggestion regarding national capital requirements for occupational pension funds – beyond the mandatory requirements of IORP II.


Banking Regulation, the Current and Future Situation

The Bank of International Settlements (BIS) has in a speech by Chairman Fernando Restoy at the CIRSF annual international conference in Lisbon addressed the present and future state of the regulation and supervision after the financial crisis of 2009. In this post we highlight the parts we found the most interesting.


ESMA has published a Consultation Paper on the Money Market Funds Regulation, Part II

ESMA has published a Consultation Paper on the Money Market Funds Regulation (MMFR). The paper represents a first stage in the development of technical advice in regards to liquidity requirements and credit quality requirements for assets received through reverse repurchase agreements, technical advice on credit quality assessment, technical standards for reporting and guidelines on the stress tests performed within the MMFR framework.

Risk | Regulations

ESMA has published a Consultation Paper on the Money Market Funds Regulation, Part I

ESMA has published a Consultation Paper on the Money Market Funds Regulation (MMFR). The paper represents a first stage in the development of technical advice in regards to liquidity requirements and credit quality requirements for assets received through reverse repurchase agreements, technical advice on credit quality assessment, technical standards for reporting and guidelines on the stress tests performed within the MMFR framework.

Risk | Regulations

The volatility components and their effect on the macroeconomy.

It is well known that the behaviour of volatility can be characterised by two components, one slowly varying long run component and a strongly mean-reverting short run component, but how do they differ in their impact on the macroeconomy?

Modelling | Volatility

What to Expect from the Upcoming Solvency II Review

In a letter from the DG FISMA of In the European Commission dated 18 July 2016, the Commission asks EIOPA for technical input to a review of the Solvency II regulatory framework focusing on three areas.

Solvency II | Look-Through

KIIDs SRRI and the Swedish mutual funds market

One of the key components of the KIID is the Synthetic Risk and Reward Indicator which is used in the process of identifying funds' risk and reward disclosure. Whilst its relationship to risk is trivial, its connection to return might not be as trivial. In order to study this relationship, we have analysed return data over 5 years from a large number of Swedish mutual funds with varying SRRI levels.

Regulations | Volatility

EIOPA proposes amendments to the adopted Solvency II Technical Standards on Reporting and Disclosure

EIOPA has proposed a number of amendments to the adopted Solvency II Technical Standards on Reporting and Disclosure. The amendments are divided into type 1 and type 2 where type 1 is amending provisions and type 2 are corrective provisions. Needless to say the type 1 amendments may have significant impact on the reporting done by the regulated insurance companies.

Solvency II | Regulations

FinTech and the Regulatory Road ahead

In a recent speech by the Managing Director of the Monetary Authority of Singapore (MAS), Mr Ravi Menon discusses, among other topics, his view on FinTech and the regulatory future the industry faces. Below we summarize some of the key points Mr Menon presented.

FinTech | RegTech | Regulations

One Year of Solvency II

With the first round of annual results and disclosure under Solvency II closing in, Bank of England's Executive Director of Insurance Supervision, David Rule, highlighted in a recent speech how Solvency II has affected the insurance industry one year on since its inception.

Solvency II | SCR | Risk

Dynamic Policyholder and Management Actions

Insurance companies need to survey Dynamic Policyholder Behaviour and model Management Action plans in order to face risk exposure arising from mass changes in the insured behaviour.

Management Action | Insurance

Libor Market Model

In this note, we explain Libor Market Model for interest rate. Furthermore, we go through the calibration of LMM conforming to Solvency II.

LMM | Model

Solvency II market risk - 3 documents to read

If you need to quickly gain an understanding of the capital requirement for market risk under Solvency II, look no further. These are the three documents you need to read.

Dependence | Solvency II | SCR

Contingent Convertible Bonds (CoCos)

Since the previous big economic crisis around 2008, regulators have pushed for banks to fund their activities with less debt and more loss-absorbing capital.