After talking about Wall Street's liquid workers, liquidity risk, liquidity reporting and liquidity management on several occasions, we had a big debate about it in the Financial Services Club a couple of weeks ago.
It interests me because it is such a wide-ranging subject. For example, liquidity in trading is all about having liquid assets to invest or cash. Liquidity in exchanges is all about having volume and market share. Whilst liquidity in payments is all about the management of cash pools.
As a result, any discussion about liquidity tends to draw a wide and diverse crowd, and this meeting was the usual eclectic mix of payments people, technologists and buy and sell side.
The meeting was titled:
"This house believes new liquid architectures will dominate strategic plans for 2010", and was chaired by PJ Di Giammarino who heads up our Capital Markets Chamber.
Panellists included Rick Weinstein, former Head of Global Structured Credit, Dresdner Kleinwort;
Andrew Carter, former CRO at Zurich Financial Services and former Head of Group Operational Risk at NatWest; and Don Deloach, CEO of Aleri.
The meeting itself got a good write up in A-Team insights, so I don't want to repeat the whole summary again. In fact, I would recommend that if you're interested in MiFID, liquidity risk and capital markets, you subscribe to their service.
Meanwhile, here's an edited version of their summary of events:
“The ‘huge price tag’ involved in the UK Financial Services Authority’s (FSA) incoming liquidity regime was a key topic of discussion at last week’s Capital Markets Chamber in London. ‘Although senior management is starting to get on board with the changes, operations people have yet to get involved in these projects in most cases,’ said PJ Di Giammarino, Chairman of the Chamber.
“There is a considerable lack of understanding about the details of the regulation and its potential impact on the financial services industry. This is gradually changing, however. The very fact that the room was filled to capacity (much like other recent events on the subject) indicates that the industry is starting to take notice of the impending regime changes.
“In order to educate attendees further, Di Giammarino, discussed the main requirements of the new regime, including the new regulatory reports and stress tests that must be introduced. ‘The systems and controls requirements will put huge pressure on firms’ data systems because of the level of granularity and the speed involved,’ he said.
“The panel discussed the potential to spot the next Lehman as a result of these new measures and it was generally agreed that although the regime may help banks to react to risk exposure in a more coordinated manner, it could not prevent another crisis.
“‘There’s no way this would help a firm to spot the next Lehman. The whole idea of objective, scientific data is a nonsense,’ said Rick Weinstein, former head of global structured credit at Dresdner Kleinwort. ‘However, it will help you see who your large exposures are to on a global basis.’
“The most controversial aspect of the new regime is the introduction of so-called liquidity buffers, which are due to be introduced in the first half of 2010 during the second implementation phase. ‘The idea of a liquidity buffer is a nonsense, the FSA instead needs to ask banks to hold higher capital reserves,’ said Weinstein. ‘Banks also need to have formal best practice procedures for how to go into liquidation in an orderly fashion.’
“Andrew Carter, former chief risk officer at Zurich Financial Services and member of the Liquidity Risk Action Network (LiRAN), warned attendees that for now they cannot ignore the impact the liquidity risk regime will have and that they must take action now. ‘Regulators are going to come down like a tonne of bricks on senior management that do not have an understanding of their liquidity risk exposure,’ he said. ‘We need to get away from the complacency that is displayed to do with risk information, boards will need to be more engaged and proactive in dealing with the implications of this information.’
“Firms have the option to respond strategically or tactically, added Don Deloach, CEO of risk management system vendor Aleri. ‘It would be a shame to miss the opportunity of aggregating this risk data at the atomic level by opting for a purely tactical response’, he said. ‘Risk management systems can give firms a competitive advantage over other players in the market by allowing them faster speed to react to market events.’
“Around 60% of the audience members indicated that they believe liquidity risk will dominate banks’ budgets for next year. The 40% that did not believe it would be the top of the budget list indicated that this was largely due to the confusion still remaining about what exactly the regime will mean for banks’ daily practices. ‘The fact that the FSA has issued so many consultation papers on the subject has not helped matters,’ added one audience member.
“The audience and panellists agreed that the make up of the board is also likely to pose problems with regards to understanding risk. ‘Most board members are the top sales people that have been promoted up the ranks of an organisation and not necessarily those that are best placed to understand the business. It also doesn’t help that the average term of a CEO is shorter than that of the implementation of a regulation,’ said an audience member.
“So, it seems that a lot of problems and challenges are still ahead of the banking industry with regards t
o getting on board with the FSA’s new regime. Although there is a general understanding that tough times are ahead, there is a considerable amount of confusion about the details of the regulation.
“What is certain is that it’s going to be costly and the industry can’t afford to ignore it.”
During the discussions however, I kept asking myself various questions.
For example, we now talk about global markets needing global solutions and global regulations yet, as demonstrated by the spat between Britain and Brussels,
we cannot even agree national and regional regulations, let alone work
on global systems and supervisory structures. If we cannot even agree
on a competent authority and supervisory structure in a country, who
thinks they can get one to work globally?
Similarly, the discussions are around being regulated by a competent authority, but what is a competent authority? The FSA is not a competent authority, as discussed on Monday, so what is? And what is the consitituency, profile and structure of staff and management at a competent authority?
Specifically, for real liquidity risk management you need real-time processing, management and reporting. The FSA wants this and the technology to do this exists and has for a while … but what's the motivation to spend the cash to achieve this? Investing for risk management is far less conducive historically for a banker, when compared with investing for revenue growth or cost reduction.
And in some ways you could believe that it's good to be too big to fail. If you're too big to fail, you know you'll get bailed out if you do fail. So what does too big to fail do to your attitude towards risk and risk management? There is no risk.
There are many more comments, questions and thoughts.
The trouble is that it's all well and good to come up with questions – what about answers?
My first answer (written in September 2007!) was to have a global data warehouse of data being traded to monitor risk.
And the DTCC is finally coming up with an answer on that one, so at least there's a start.
Unfortunately, Europe appear to want their own repository however, so this debate will rumble on (and on and on) for a long while to come.