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CMRA Commentary

CMRA Articles and Commentary

Asset Liquidity Risk: Piecing Together the Puzzle

Liquidity risk is a key risk and has been a recent focal point for regulators, with increasing transparency and attention demanded by SEC Rule 22e-4 for mutual funds and by Basel III's liquidity requirements for banks. Meanwhile, market participants have a sense that asset liquidity may be deteriorating, but there is little agreement even on the definition of liquidity risk or on how exactly to measure it. It is clear, however, that asset liquidity risk is multifaceted and managing it is both an art and a science.

We explore some of the questions surrounding asset liquidity risk in our whitepaper.

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CMRA's Expert Analysis and Testimony Instrumental in Carlyle's $2bln Litigation Victory in Guernsey Court

The expert analysis and testimony prepared by Capital Market Risk Advisors (CMRA) - a leading risk management, risk governance, and litigation support boutique for the past 25 years - was extensively cited in a 524-page judgement dismissing all 187 claims, with almost $2 billion in alleged damages at stake, against Carlyle Capital Corporation Ltd's directors in a case involving leveraged RMBS.

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The Great (Disappearing) Recession: Adding Historical Data Desensitizes the Shock

Lehman Brothers filed for bankruptcy on September 15, 2008 and the subsequent Great Recession reached its peak in 2009. Because these were the biggest and most stressful financial events of the last 80 years, historical data from 2008 and 2009 form the basis for much of today’s risk stress testing. However, as the intervening years push us further away from 2008 and 2009, the Great Recession’s impact on risk metrics can start to recede.

Most financial services companies use stress scenarios that are based on historical data. For example, the 99th percentile adverse move over a 10-day period is a common cut-off for the development of stress scenarios. Notably, such a stress scenario is by definition no more severe than the 99th percentile.

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CMRA's Uncleared Swap Margin Survey Results

CMRA has surveyed a variety of market participants and market observers on the margin regulations for uncleared swaps, which have been gradually rolling out since the fall of last year. Survey participants shared their thoughts on variation margin, initial margin, and ISDA SIMM.

  • Variation margin compliance is on target to be completed by September 2017
  • Requirements for margin to be posted in cash by larger counterparties raise funding cost concerns
  • T+1 settlement in the US vs. T+2 in Europe is causing problems with collateral management and optimization
  • Initial margin regulations are rolling out gradually but funding costs are already seen as high enough to push additional product types to CCPs
  • Initial margin (based on a 10-day 99% move) is reported to be too high for relatively liquid product types and too low for large or illiquid swaps relative to risk
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Are your pricing policies and procedures for less liquid instruments adequate? – the SEC is looking

The unrelated position mismarking incidents that quickly precipitated the closures of both Visium Asset Management and Marinus Capital have been recent focal points for market participants, but regulatory scrutiny of valuation choices for less liquid instruments is certainly not new. Askin, Piper Capital Management, and other market participants have also faced high profile regulatory/legal consequences when valuation issues exceeded regulatory tolerances (see the walk down memory lane below). However, even market participants who have had the good fortune of avoiding Wall Street Journal headlines likely still face challenges on a daily basis when marking less liquid and hard-to-value positions.

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