Learning Curve

The recommendations of the U.K.’s Independent Commission on Banking chaired by Sir John Vickers published Sept. 2011 will have a profound effect on banking in the U.K.

Enhancing counterparty credit risk management practices is a key focus for banks. This is in response to changes in accounting rules and new prudential and market regulations, which have tightened substantially following the financial crisis.

Many insurers currently link equity-indexed annuities (EIAs) to well-known equity indices, such as the S&P 500, NASDAQ 100, or Russell 2000. However, some insurers are considering linking their EIAs to volatility control indices instead, such as the S&P 500 Risk Control Index series.

Technically, Uridashi is an autocallable with two barriers and tenors usually from three to five years. The lower barrier is usually struck between 50% to 70% of the initial spot and continuously observed, at which point investors sell the down-in puts to the issuers. The upper barrier is struck at 105%-110% of the initial spot, which is the knock-out or autocall level, observed discretely at every 6-month pre-determined observation dates.

There has been no shortage of media coverage about the swaps market transformation, but with deadlines fast approaching the question of buyside preparedness is looming large.

Financial innovation is arming investors with a growing array of vehicles to protect portfolio risk. In the U.S., portfolio managers are increasingly utilizing futures and options on the Chicago Board Options Exchange VIX index as part of hedging programs.

The Foreign Account Tax Compliance Act generally imposes a 30% withholding tax on (i) withholdable payments (generally, U.S. source interest and dividends and gross proceeds from a disposition of equity and debt instruments issued by U.S. persons); (ii) foreign passthru payments (a term yet to be defined), if such payments are made to a foreign financial institution that fails to provide certain information about its account holders to the Internal Revenue Service; and (iii) certain payments made by an FFI to an account holder that fails to establish whether it is a U.S. person (or whether it is a non-U.S. entity owned by U.S. persons).

Equity markets have unofficially reached go-go status. There are a number of investors following the buy anything playbook and so far this year it is working. However, the option market is singing a very different tune.

The measurement and management of counterparty risk is in the midst of a revolution. Within recent memory of most counterparty risk managers it all used to be so much simpler. Limits were set on the same basis as traditional lending, and the exposure measured against those limits was quantified using simple add-on factors applied to the notional of each transaction.

Recent developments in China and other jurisdictions indicate that the internationalisation of Renminbi is moving forward rapidly. Over the course of 2012, the value of payments using RMB grew by 171% and the ranking of RMB as a payment currency jumped from 20th place in January 2012 to 13th place by the end of February 2013 (SWIFT Monthly RMB Tracker – February 2013). The Chinese government has given a clear indication of its ambition to further accelerate regulatory reforms to liberalise RMB in 2013.

Market participants in a number of jurisdictions outside of the U.S. use different types of electronic systems to offer structured products. In these countries, brokers and investment advisers use these types of programs to show investors the pricing and terms for different types of offerings.

As the financial industry prepares to meet new derivatives reporting requirements, the need for a centralized system that facilitates trade reporting convergence across geographies and asset classes has emerged as a top priority.