presentation on emerging risks - iosco on emerging risks.pdf · head of the research department...
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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
0
2
4
6
8
Perce
nt (%
)
2010 2011 2012 2013 2014Source: 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
-4
-3
-2
-1
0
1
2
3
4
5
6
2005 2006 2007 2008 2009 2010 2011 2012 2013
Perc
ent (
%)
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
0
30,000
60,000
90,000
120,000
150,000
180,000
210,000
240,000
270,000
300,000
0
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
$U
S (m
illio
ns)
$U
S (m
illio
ns)
Australasia Europe Latin America MENA Asia North America (RHS)
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Low interest rate environment • While IPOs on the equity markets seems less attractive for firm´s funding…
Graph 4: IPO activity ($ M)
Source: World Federation of Exchanges
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
2007 2008 2009 2010 2011 2012
$U
S(m
illio
ns)
Americas Asia Pacific Europe
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Low interest rate environment • Certain segments of bond markets show high volumes of issuance,
especially high yield in the US – EU shows moderate levels…
Graph 5: High yield corporate bond issuance per month ($ bn)
Source: IOSCO Risk Dashboard, Dealogic
$0
$10
$20
$30
$40
$50
$60
2007 2008 2009 2010 2011 2012 2013
$US
(Bill
ions
)
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
0
100
200
300
400
500
600
700
2007 2008 2009 2010 2011 2012 2013
bp
s
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 out 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 offered
prospectus
?=
B:
Funding source:
Transparency:
? E:= D:
S:
Collateral in a stressed funding environment
Retail Wholesale
Source: IOSCO Research Department 18
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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
0
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
$US
(Bill
ions
)
US MMF AUM
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Collateral in a stressed funding environment
• Issuance of structured products (ex. covered bonds) has fallen…
Graph 8: Issuance of structured products in EU and US ($ bn)
Source: IOSCO Risk Dashboard, Dealogic
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2007 2008 2009 2010 2011 2012
$US
(Bill
ions
)
Europe North America
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Collateral in a stressed funding environment
• Issuance of covered bonds has grown from 2007 to 2012, and is a merely European funding vehicle…
Graph 9: Issuance of covered bond ($ bn)
Source: IOSCO Risk Dashboard, Dealogic
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
2006 2007 2008 2009 2010 2011 2012
$US
(Bill
ions
)
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; 25
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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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