Risks Werner Bijkerk Head of the Research Department European - - PowerPoint PPT Presentation

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Risks Werner Bijkerk Head of the Research Department European - - PowerPoint PPT Presentation

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Risks Werner Bijkerk Head of the Research Department European Regional Committee Lisbon, 7 March 2013 Disclaimer The views and opinions presented in this presentation are of the presenter only and do not necessarily reflect the views and

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Risks

Werner Bijkerk Head of the Research Department

European Regional Committee Lisbon, 7 March 2013

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Disclaimer

The views and opinions presented in this presentation are of the presenter only and do not necessarily reflect the views and opinions of IOSCO or its individual members.

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Agenda

  • Introduction
  • Risks

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Agenda

  • Introduction
  • Risks

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Introduction

  • Research Function of IOSCO working on emerging

risks (SCRR; Research Department)

  • Work Plan:

– Risk Outlook – Risk Identification Methodology – Risk Dashboard – Risk Roundtables – Risk Surveys – Market Intelligence – Consultation of IOSCO Committees

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Agenda

  • Introduction
  • Risks

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Risks

  • Low interest rate environment
  • Collateral in a stressed funding environment
  • Derivatives markets
  • Cyber-crime

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Risks

  • Low interest rate environment
  • Collateral in a stressed funding environment
  • Derivatives markets
  • Cyber-crime

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Low interest rate environment

Economic recession is deep in various parts of the Eurozone but recovery expected in 2014.

Graph 1: GDP growth (%)

  • 4
  • 2

2 4 6 8 Percent (%) 2010 2011 2012 2013 2014

Source: IOSCO Risk Dashboard, IMF

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Low interest rate environment

Expansionary monetary policies reduce real interest rates to maintain the functioning of the financial markets and to combat the recession

Graph 2: Real interest rates (%)

Source: IOSCO Risk Dashboard, Bloomberg

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  • 3
  • 2
  • 1

1 2 3 4 5 6 2005 2006 2007 2008 2009 2010 2011 2012 2013 Percent (%) UK Eurozone Germany US

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Low interest rate environment

  • Cheap borrowing for big firms (not SME´s) drive corporate bond issuances

up…

Graph 3: Corporate bond issuances ($ M)

Source: Dealogic

30,000 60,000 90,000 120,000 150,000 180,000 210,000 240,000 270,000 300,000 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000 2007 2008 2009 2010 2011 2012 $US (millions) $US (millions) Australasia Europe Latin America MENA Asia North America (RHS)

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Low interest rate environment

  • While IPOs on the equity markets seems less attractive for firm´s funding…

Graph 4: IPO activity ($ M)

Source: World Federation of Exchanges

10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 2007 2008 2009 2010 2011 2012 $US(millions) Americas Asia Pacific Europe

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Low interest rate environment

  • Certain segments of bond markets show high volumes of issuance,

especially high yield in the US – EU shows moderate levels…

Graph 5: High yield corporate bond issuance per month ($ bn)

Source: IOSCO Risk Dashboard, Dealogic

$0 $10 $20 $30 $40 $50 $60 2007 2008 2009 2010 2011 2012 2013 $US (Billions) Europe North America

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Low interest rate environment

Graph 6A .Private sector spreads over 10yr Government treasuries (percentage points), US Graph 6B. Private sector spreads over generic Iboxx 10yr yields (percentage points), Euro area

100 200 300 400 500 600 700 2007 2008 2009 2010 2011 2012 2013 bps BBB Spread AAA Spread

IOSCO Risk Dashboard, Bloomberg

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Low interest rate environment

Trends:

  • High yield bonds sold through collective investment schemes and retail

structured products/exchange traded funds and products (ETF, ETP).

  • In certain European countries search for yield goes into real estate and

real estate funds (e.g. Germany, Nordic countries, Switzerland). Some questions about the risks: – Do investors know the risks? – What if interest rates go up or stay low for a very long period? – Could there be problems of investors being locked in? And a question about an opportunity for the stimulation of financial stability/global economy: – What are the ideas for the inclusion of SME´s?

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Risks

  • Low interest rate environment
  • Collateral in a stressed funding environment
  • Derivatives markets
  • Cyber-crime

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Collateral in a stressed funding environment

Trends:

  • Available high quality collateral has shrunk from $ 10 trillion in 2007

to $ 6 trillion in recent years (IMF)

  • Shift from unsecured to secured financing as confidence has

dropped

  • Funding environment changed by regulation:

– Basel capital rules (huge impact on collateral) – MMF rules (e.g. shortened maturities) – Margin requirements OTC derivatives (expected huge impact on collateral) – Rules on structured finance products

  • Collateral squeeze…

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Deposits MMFs Structured products Repo Securities lending Structured retailprod. Equity Bonds Collateral transform Re-hyp. Central Bank Funding trend:

Assets as collateral for cash placed with Central Banks Debt titles placed with Money Market Funds Asset backed securities (CDO ↓ covered bonds ↑) sold to investors Assets lent

  • ut under

temporary repurchase

  • agreem. w.

investment banks Securities lent out for a fee to brokers and investment banks Securities borrowed from investors and lent-out for a fee Collateral packaged and upgraded sold to clients

Off-balance sheet, bi-lateral transactions and contracts On-balance sheet, if publicly offered, prospectus

Partly off- balance sheet, if publicl

  • ffered

prospectus

?=

B:

Funding source: Transpa rency:

?

E:= D: S:

Collateral in a stressed funding environment

Retail Wholesale

Source: IOSCO Research Department

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Collateral in a stressed funding environment

  • MMFs AUM is back at pre-crisis levels after huge outflows

Graph 7: Asset under management of US MMFs ($ bn)

Source: IOSCO Risk Dashboard, Bloomberg, ICI

500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 $US (Billions) US MMF AUM

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Collateral in a stressed funding environment

  • Issuance of structured products (ex. covered bonds) has fallen…

Graph 8: Issuance of structured products in EU and US ($ bn)

Source: IOSCO Risk Dashboard, Dealogic 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2007 2008 2009 2010 2011 2012 $US (Billions) Europe North America

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Collateral in a stressed funding environment

  • Issuance of covered bonds has grown from 2007 to 2012, and is a merely

European funding vehicle…

Graph 9: Issuance of covered bond ($ bn)

Source: IOSCO Risk Dashboard, Dealogic

$0 $50 $100 $150 $200 $250 $300 $350 $400 $450 2006 2007 2008 2009 2010 2011 2012 $US (Billions) Europe Latin America North America North Asia Australasia

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Collateral in a stressed funding environment

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before crisis now Collateral $ 10 trillion $ 6 trillion Money Market Funds (US) $ 2.5 trillion $ 2.7 trillion Structured products (US) $ 1.6 trillion $ 600 billion Structured products (EU) $ 420 billion $ 100 billion Covered bonds $ 300 billion $ 400 billion Securities lending $ 1.7 trillion $ 1 trillion Triparty repo (US) $ 2.5 trillion $ 2 trillion Repo market (EU) € 4.6 trillion € 6.2 trillion Collateral transformation ? ? G7 GDP $ 32.4 trillion $ 35.7 trillion

Source: IOSCO RD, IMF, M. Singh (2013), Dealogic, Bloomberg

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Collateral in a stressed funding environment

  • Collateral transformation is a new service and we don´t know

exactly what it is, nor how big it is…

  • We know that it is off-balance sheet
  • Just as certain structured products, repo, securities lending

and re-hypothecation

Some questions about the risks: – Is there (implicit) leverage being created by banks? – Are risks being hide or shifted out of the regulator´s sight? – How long are the collateral chains? – Where do the risks pool? – How big are the interdependencies with CCPs?

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Risks

  • Low interest rate environment
  • Collateral in a stressed funding environment
  • Derivatives markets
  • Cyber-crime

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Derivatives markets

CCPs concentrate risks and provide transparency. Last years’ CCP usage increased considerably.

Table 2: Notional volumes of selected CCPs around the globe 2011 - 2012

CCP Region Product Dec-11 ($US, billions) Dec12 ($US, billions) % Chg CME US IRS $114 $1,300 1040% SGX ASIA IRS $184 $251 36% LCH EU IRS $283 $339 20% Japan SCC Asia IRS

  • $1,280

n/a CME US CDX $15 $98 553% LCH EU CDS & ITRAXX $68 $135 99% ICE US CDS & CDX $12,000 $21,000 72% ICE EU CDS & ITRAXX $8,000 $12,000 40% Japan SCC Asia CDS

  • $3,300

n/a CLS Global FX $4,380* $4,610 5% LCH EU FX

  • $115

n/a Source: CME, Singapore Stock Exchange, LCH Clearnet, ICE, CLS, SCC, theOTCspace; compiled by IOSCO Research Notes: * Data as at Jan 2012;

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Derivatives markets

Issues:

– Collateral absorbed by CCPs. Further squeeze? – CCPs following similar risk management model – amplification? – CCPs accepting lower quality collateral – race to the bottom? – CCPs becoming active derivatives shops? – Enhanced interconnection with banks – more concentrated risk? – What is the resilience of the system:

  • In the case of a huge margin call?
  • In the case a big trader/bank fails?

– Where are the weak spots in the network?

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Risks

  • Low interest rate environment
  • Collateral in a stressed funding environment
  • Derivatives markets
  • Cyber-crime

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Cyber crime

Issues:

– Financial system relies on technological infrastructure. – Nature of cyber-crime is changing – more sophisticated. – Methods, motives, purposes and consequences not clear. – Attack: not an ‘if’ but a ‘when’ question.

Questions:

– Systemic impact? – How vulnerable are financial market infrastructures? – Awareness is growing, but are regulators prepared?

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