Matt Harris

Basel 3.1: indexation reversal adjustment What is ‘indexation reversal adjustment’? You need to ask Conrad O'Donnell who led some excellent analysis for the BSA and coined the phrase. I learnt a lot from working with Conrad on this important topic. I’m not sure the impact in our sector had really been appreciated before his analysis. So big shout out and thank you to Conrad O'Donnell 🙏 The indexation reversal adjustment is the impact of changing LTVs and RWAs for mortgages so that they are based on the original valuation of the property. This compares to the current approach whereby a lender will update valuations periodically to give a current valuation i.e. to take account of changes in house prices. The current valuation approach is more risk-sensitive and will allow LTVs and RWs to rise and fall in line changes in the valuation. So why the change? I suppose the idea is to reduce cyclicality in risk weights. This means when house prices are more volatile then capital requirements remain stable. It is also more conservative. The PRA proposals do still require a re-calculation if “there is a significant decrease in the market value of the property as a result of a broader decrease in market values.” So in essence, the requirements are non-cyclical as property prices rise, but become procyclical when property prices fall i.e. just at the point you don’t want them to be cyclical! I have a personal view that the revaluation during a downturn will be difficult to implement. Firms will naturally not wish to re-value their whole portfolio too soon or too late. Calling that moment will be challenging. For the supervisor to call it will be even more challenging as they will need to do it across all firms at the same time and the risk is its at a point that is too late and exacerbates any capital issues. So, some learnings from me: 🏠The impact of changing to original valuation will be a large one-off hit. The BSA has proposed that the PRA allow firms to freeze the valuation at the B3.1 implementation date of 1st July 2025 but then stop future indexation. This would create a natural transition, rather than the headache of finding all old valuations for every loan 🏠The impact is particularly harsh for lifetime mortgage portfolios where the product is longer, unlikely to include a product switch and there are no regular repayments 🏠Firms will likely need to store two valuations in their systems. A current valuation will be needed for risk management purposes as well as original valuation for the regulatory capital calculation. So there is an IT aspect to this change, as well as the challenge of finding all old valuations that may no longer be stored 🏠While I think this policy has a significant risk of unintended consequences, it is also a key component of the Basel package, so in my personal opinion it is unlikely to change, well not until after the next housing market crash! #financialregulation #baselcommittee

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A couple of (hopefully useful) thoughts from my presentation at QuantMinds on the potential of structural corporate liabilities pricing framework to bridge some gaps in factor investing. #QuantMinds #StructuralFactorInvesting https://lnkd.in/esK4GBWM

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ESTR Futures - Latest update. ICE setting a new open interest record with their contract at just over 400k lots. Cumulatively across the exchanges now 583k (Euribor 3.9m). From the trenches we saw less volume over the last 2 weeks, suggests Traders default to the deeper liquidity of Euribors during bouts of volatility but the overall growth trend continues in ESTR. #markets #futures #options #ice #eurex

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A bit shocking to learn from the UK regulator that banks do not run stress-testing analysis on their Private Equity / Leveraged Finance exposures. Especially if one remembers each bank lost hundreds of millions or for some a billion + due to these exposures in 2008 (TXU, LyondellBasel, Boots...). #leveragedfinance #banks #stresstesting #privateequity #bridgeloans

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Here is a useful summary of one of the panel sessions at Quant Strats, which I was unfortunately unable to attend.  There were a couple of quotes about the data-hunting aspect of alternative data sourcing.  It’s quite true that the real needles in a haystack are often not at the data conferences.  When we were starting out, these (not cheap!) conferences were not within our budget, and even though we knew we had some really unique and valuable datasets, you wouldn’t have seen us with a booth anywhere.  Mark Fleming-Williams also correctly worries about consolidation in the data space - there are of course pros and cons.  On the other hand, if you hunt around (like we do!) then you’ll always find really cool companies doing really unique things, and that’s often where the alpha is. https://lnkd.in/g75ZKPf8

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Click the link below for Lipper's webinar review of the UK fund market, Q2 2024. Looking at active v passive flows, which asset classes have been making the running (and which haven't), insights at the more granular level of the #Lipper fund classifications, and a drill down into where the money's been going in #sustainable_investing. The downside is that you have to listen to me do it, but you can't have everything...

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It was great to see Portfolio Manager, Helen Mason and Kellie Wood, Head of #FixedIncome featured in the Financial Standard recently (https://okt.to/H7V5Sd). In the article, they discuss the forces at play in the Australian credit universe and the launch of the Schroder Australian High Yielding Credit Fund. If you would like to find out more about the Fund, please register for our upcoming webinar: https://okt.to/gdzGDm #Investing #Insights #Schroders #Credit

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The success of GIPS® standards at compliant firms heavily relies on a strategic approach to GIPS standards maintenance. While many individuals step away from GIPS after the implementation, establishing a dedicated GIPS committee proves vital. This committee should play a key role in overseeing maintenance and actively participating in decision-making processes. Despite challenges, this proactive strategy remains the most effective for sustaining GIPS standards. GIPS should not be the sole responsibility of a junior person in the performance area. Please add a comment to agree or disagree with me. #Compliance #Standards #Investmentperformance #performance #Solve

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For those looking to sort out idiosyncratic alpha vs. factor exposures, this book is a very good mix of theory and practice. There are also some nice bits on how to think about position size limits and constructing stop-loss strategies. https://lnkd.in/gyidsCx4

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This month, I appeared on the FT Advisor podcast speaking with Simoney Kyriakou at the Financial Times about the growth of Independent Investment Management Initiative and what this means for the outlook for specialist asset managers. We touched on regulation, DE&I, innovation and the opportunities for the most entrepreneurial firms and the most active, active asset managers in our sector. What a pleasure, thank you Simoney Kyriakou. #boutiques #assetmanagement #growth

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A great flow chart from the UK Investment Association for those who want to understand which fund share class to select as 'primary'. In contrast to how some data providers default to the oldest, legacy share class, it seems very clear that one should perhaps choose a share class that is 'unbundled', and 'freely available to all investors... '. For the Marlborough Multi Cap Income Fund, this is the 'P' share class! This also covers c.99% of all fund units in issue so most representative of the returns delivered to the wider investor base.

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Good product variety this week by both payoff and underlying. Product types include worst-ofs for higher yield, daily opportunity Autocalls, defensive last call levels. Underlyings feature the Nikkei 225, Eurostoxx-50 and SPX-500 plus a decrement version of the FTSE-100 in addition to the ever present FTSE-100

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Last but not least the Bank of England gets into line with other regulators and kicks the can down the road - indecision is the new equivalence. The consensus among regional regulators, which remained strong in the years following the GFC, is still tight but in a bad way. The Fed, the ECB, and now the BoE have all postponed critical decisions on Basel3 endgame due to pressure from banks and politicians. The macro outlook on credit risk remains bleak, potentially leading to regrettable consequences. [Read more](https://lnkd.in/e6tj-K55)

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Genuine question for fellow QT nerds / financial plumbing experts. The BoE MPC voted to keep the pace of Quantitative Tightening unchanged at £100bn for the next 12 months, c. 90% of which will come through a passive run-off of existing holdings, and c. 10% from active sales. Bank reserves are currently upwards of £700bn, well above the BoE’s own estimate of even the £490bn upper bound of the Preferred Minimum Range of Reserves (which should delineate between what central bankers have started calling “abundant” and “ample” reserves). In other words, by the Bank’s own reckoning, it should have lots of room to shrink its balance sheet before bank reserves start to become scarce. Fine. However, this is happening against the backdrop of exponentially growth in banks drawing on the Bank’s Short Term Repo (STR) facility – not something you would expect in an environment where every bank has “abundant” reserves. If you were sitting on the MPC, would this give you pause? Are there any risks associated with moving out of "abundant" territory too quickly, or are gilt-backed reserves just going to seamlessly get replaced with repo-backed reserves?

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Who, why and how in #hedgefund manager selection. Multi-strategy funds. Trend following, mean reversion and market making. Big vs small. Collaborative vs pods. High Sharpe vs high capacity. All this and more as Sir Michael Fallon and I speak with special guest rishi narang, Founding Principal at T2AM LLC and the author of "Inside The Black Box" in a new episode of Capital Horizons The Podcast to be released this Friday. Tune in!

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The age old repo market, deep in volume, broad in reach, and rich in information is fertile ground for Machine Learning. This paper delves into LRH data and applies various machine techniques to better understand the GC markets. Written by Marian Priebe LRH's Quant Analyst, it is centered on how GC & specials are classified currently & how other techniques could be considered offering the users an advantage. Using SFTR data, covering the major government repo markets, Marian has exhaustively researched the options & offers the reader - & the alchemists of the repo markets- informed choices of how to classify their own trades & the difference these can make to GC rates. 

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ALL GOOD THINGS COME IN 3'S LEHMAN FIXED INCOME MANUAL. (DERIVS ON INFLATION SPECIAL) The final instalment of the Lehman trio is the wonderful Fixed Income Manual. My first lesson in debt/yield/tsy curve was given to me by one of the best traders I know. He was a PM at a large hedge Fund and taught me (in simple terms) what each tenor meant alongside the gears to those tenors. He taught me the WHYS but he also taught me the supply and demand of the curve. As a young FX trader I was overwhelmed but I stuck with it and it made me understand something I had never believed in. THE TRUTH. If want the PDF copy LIKE this post and leave a comment as to why FI is the truth.

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Alex has a great summary of the BlackRock - Preqin deal here. And his excellent Substack is quickly becoming part of my weekly required reading!

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