Week InReview
Friday | May 3, 2019
Tweet of the Week
in case you missed it...
Securities and Exchange Commission Chair Jay Clayton said that financial regulators across U.S. government are looking out for possible risks in CLO market amid growth in leveraged loans. Clayton says that issue has come up because many people have pointed to increase in leveraged loan issuance. (Bloomberg Law | May 2)

U.S. regulators  told banks and investors that it was OK to make  riskier loans to companies. Now they're having trouble reining in the excesses that resulted. In the first quarter, banks and investors helped bring some of the highest debt levels of this decade to leveraged buyouts and other acquisitions. Lenders are letting companies aggressively massage measures of their profits when posting them for credit investors. And more and more lender protections are being watered down. (Bloomberg Government | May 1)

ICE (Intercontinental Exchange) is betting on further digitization of the U.S. mortgage market with the $335 million acquisition of Simplifile, a firm that facilitates electronic processing of mortgage records. The Atlanta-based company owns the NYSE and other exchanges around the world and recently has been pushing deeper into areas including bond trading and mortgages. (The Wall Street Journal | May 1)

The Commodity Futures Trading Commission will expand its stress test of derivatives clearinghouses to ensure the clearing system can withstand market and systemic shocks, CFTC Chair J Christopher Giancarlo said. A stress test of CME Group and London Stock Exchange Group-owned LCH has found they have "sufficient prefunded resources" to survive severe market stress. (MLex | May 1)

The widespread adoption of blockchain technology in securitization could increase the risk of a systemic crisis, a Moody's report warns. The analysis echoes findings in a July 2018 European Banking Authority report warning that reliance on a single blockchain provider across several transactions could lead to build-up of systemic risk. (Cointelegraph | Apr 29)
'The Big Short' doomsday machine is back
Margot Robbie in 'The Big Short' explaining subprime CDOs
(Apr 27) — Thomson Reuters’ International Financing Review (IFR) reported this past weekend that some of the biggest names on Wall Street have returned to creating and/or trading synthetic collateralized debt obligations (Synthetic CDOs). Writing for IFR, Christopher Whittall reports that “Trading volumes in synthetic collateralized debt obligations linked to credit indexes are up 40% this year, according to JP Morgan, after topping $200bn in 2018 on the back of three years of double-digit growth. Meanwhile, analysts predict more than $100bn in sales of bespoke synthetic CDOs in 2019 following an estimated $80bn of issuance last year.” Read more here.
CFTC chief urges Fed to cut burden in swaps margin requirements
(May 2) — Commodity Futures Trading Commission Chair J. Christopher Giancarlo is asking the Federal Reserve to make it easier for smaller swaps market participants to deal with new demands for initial margin on uncleared transactions.
  • Giancarlo warned that smaller players may be needlessly forced into compliance burdens by “phase five” implementation of margin rule for uncleared swaps set for September of next year.
  • In letter to Randal Quarles, the Fed’s vice chair for supervision, Giancarlo asked that regulators clarify that those below $50 million in calculated margin don’t need to prepare for new margin requirements even if they exceed the $8 billion threshold for registering as swaps dealers.
  • Issuing guidance to clarify the matter would “significantly reduce the compliance burden of entities that would not, in any case, be required to post initial margin,” Giancarlo said.
  • He also asked that global regulators at Basel Committee on Banking Supervision and other international groups further move to ensure smaller players don’t need to engage in documentation, custodial or operational requirements.
the cyber cafe
Auditors urged to weigh cybersecurity in assessing client risks
(May 2) — Auditors should do more to consider whether cyberthreats could have a material effect on the financial statements of their clients, a Public Company Accounting Oversight Board member said. “Auditors should consider cybersecurity as part of their risk assessment,” Kathleen Hamm said. She spelled out the steps auditors should take to address cyber security risks — including testing controls — in a speech at the Baruch College annual financial reporting conference May 2.
  • The PCAOB doesn’t have a specific audit standard to assess cyber security risks, but Hamm said a standard is an idea she has been considering.
  • The board’s risk assessment rule is flexible enough that auditors could broaden it to assess cybersecurity risks.
  • The board, through its inspections process, has started asking firms about their responses to cyber breaches involving a client and what they are doing to protect their clients’ data.
  • Most public companies face at least some exposure to cyberattacks or breaches, and those risks will only grow as companies become more digitally intertwined with their customers and vendors.
binge reading disorder
Raceworthy Kentucky Derby drink recipes
From the fabulous hats and everyone in their Sunday best (even though it’s always on Saturday) to those who love to whoop it up in the Derby Infield, the Race to the Roses has always been a can’t-miss event. And with this can’t-miss show comes great southern cocktails. Here are a couple of libations to sip while you're cheering for your horse to be the first across the finish line.

How prostitutes and paparazzi hedge their risk
Allison Schrager has some interesting lessons on risk management. The author of "An Economist Walks Into a Brothel" applies, with a light touch, serious finance principles to managing risk for a host of risky businesses, like legal bordellos, stud farms and Hollywood film studios.

Productivity software should be something you use less than the thing you used before
Teams, Slack, and Workplace were supposed to make us more productive. They didn't. Instead they placed an emphasis on new technology and created a productivity pit.