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Anh Nguyen, Computerworld UK, Top JP Morgan and UBS IT execs leave for HPC vendor, here. Wonder if they are going to sell the gaussian copula FPGA implementation to another bank? Computerworld UK appears to be an utter stranger to Irony.
The two new appointments are Stephen Weston, who was managing director and global head of applied analytics at JP Morgan, and Steven Hutt, former managing director and global head of credit analytics at UBS.
Weston was responsible for a major IT project using Maxeler technology at JP Morgan, which enabled the investment bank to run risk analysis and price its global credit portfolio in near real-time.
Almost missed the quotes:
“The overwhelming benefits of dataflow technology are directly measurable and undeniable,” said Weston.
“Having experienced them first-hand at JP Morgan, my new mission is to help the finance industry understand the revolution in value that this technology brings through making real-time computation and scenario analysis feasible, for both the largest and the most complicated problems.”
He said “revolution in value,” very clever.
Redline Pre-Trade Risk Checks, here.
The Securities and Exchange Commission Rule 15c3-5 – Risk Management Controls for Brokers or Dealers with Market Access mandates that broker-dealers implement risk management controls and supervisory procedures to ensure compliance with all regulatory requirements in connection with market access. While these measures will help to provide protection to the markets, the additional thresholds built into the execution process have the potential of creating unwanted latency in trading systems.
SEC, Risk Management Controls for Brokers or Dealers with Market Access, Final Rule, here.
SUMMARY: TheSecuritiesandExchangeCommission(“Commission”or“SEC”)isadopting new Rule 15c3-5 under the Securities Exchange Act of 1934 (“Exchange Act”). Rule 15c3-5 will require brokers or dealers with access to trading securities directly on an exchange or alternative trading system (“ATS”), including those providing sponsored or direct market access to customers or other persons, and broker-dealer operators of an ATS that provide access to trading securities directly on their ATS to a person other than a broker or dealer, to establish, document, and maintain a system of risk management controls and supervisory procedures that, among other things, are reasonably designed to (1) systematically limit the financial exposure of the broker or dealer that could arise as a result of market access, and (2) ensure compliance with all regulatory requirements that are applicable in connection with market access. The required financial risk management controls and supervisory procedures must be reasonably designed to prevent the entry of orders that exceed appropriate pre-set credit or capital thresholds, or that appear to be erroneous. The regulatory risk management controls and supervisory procedures must also be reasonably designed to prevent the entry of orders unless there has been compliance with all regulatory requirements that must be satisfied on a pre-order entry basis, prevent the entry of orders that the broker or dealer or customer is restricted from trading, restrict marketaccess technology and systems to authorized persons, and assure appropriate surveillance personnel receive immediate post-trade execution reports.
The financial and regulatory risk management controls and supervisory procedures required by Rule 15c3-5 must be under the direct and exclusive control of the broker or dealer with market access, with limited exceptions specified in the Rule that permit reasonable allocation of certain controls and procedures to another registered broker or dealer that, based on its position in the transaction and relationship with the ultimate customer, can more effectively implement them. In addition, a broker or dealer with market access will be required to establish, document, and maintain a system for regularly reviewing the effectiveness of the risk management controls and supervisory procedures and for promptly addressing any issues. Among other things, the broker or dealer will be required to review, no less frequently than annually, the business activity of the broker or dealer in connection with market access to assure the overall effectiveness of such risk management controls and supervisory procedures and document that review. The review will be required to be conducted in accordance with written procedures and will be required to be documented. In addition, the Chief Executive Officer (or equivalent officer) of the broker or dealer will be required, on an annual basis, to certify that the risk management controls and supervisory procedures comply with Rule 15c3-5, and that the regular review described above has been conducted.
FTEN, Per-Trade Risk: The Final Countdown, here.
Last November, the seC laid down the gauntlet to the sell side by making broker-dealers expressly responsible for their own and their clients’ pre-trade risk management systems and processes. the move had been widely anticipated, but the seC took a crucial further step. by securing a mid-January publication date in the Federal register, it set a deadline for compliance of 14 July, giving the industry just six months to get its pre-trade risk house in order
Zerohedge, JPM Admits CIO Group Consistently Mismarked Hundreds Of Billions In CDS In Effort To Artificially Boost Profits, here. It’s not that Durden has the facts wrong, he knows what he is writing about (plus some spin), it’s that there is too much joyous rapture seeping through the prose. It’s like watching Taleb gloat about the VaR. You need to shower with hand sanitizer after reading their cathartic low downs.
Back on May 30 we wrote “The Second Act Of The JPM CIO Fiasco Has Arrived – Mismarking Hundreds Of Billions In Credit Default Swaps” in which we made it abundantly clear that due to the Over The Counter nature of CDS one can easily make up whatever marks one wants in order to boost the P&L impact of a given position, this is precisely what JPM was doing in order to boost its P&L? As of moments ago this too has been proven to be the case. From a just filed very shocking 8K which takes the “Whale” saga to a whole new level. To wit: ‘the recently discovered information raises questions about the integrity of the trader marks, and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses being incurred in the portfolio during the first quarter. As a result, the Firm is no longer confident that the trader marks used to prepare the Firm’s reported first quarter results (although within the established thresholds) reflect good faith estimates of fair value at quarter end.”
Shit, everyone knows that, tell us something we don’t already know.
OK, when they were marking to market, they were thinking about guys.
Bradley Keoun, Bloomberg, JPMorgan Silence on Risk Model Spurs Calls for Disclosure, here. Is it me or does Mr. Keoun have trouble taking a hint?
The skewed comparisons can leave investors guessing about whether the potential for loss is rising or falling, according to risk analysts. Adding to the muddle, some bankers including JPMorgan Chief Executive Officer Jamie Dimon have told investors not to rely too much on VaR, calling it just one part of their effort to manage risks at the biggest lenders.
Ok there it is, in Mr. Keoun’s reporter notebook. Unless Mr. Dimon is somehow trying to trick people, this should have cleared things up. I think Mr. Dimon should be even more straight forward. Something like:
“VaR is for reporting to regulatory bodies after-the-fact because the real models are too local market specific and too difficult to master in a short period of time.” and
“VaR cannot precisely track the market valuation fluctuations so it is not useful for running many hedged derivative books but we take VaR seriously for after-the-fact macro Regulatory Reporting” and
” No sane person runs front office P&L and Risk on an inventory of CDX and standard tranches with VaR model, ever, no exceptions”
but it still might not be clear enough.
SEC Chairman Mary Schapiro told a Congressional panel last month that her agency is scrutinizing the banks’ disclosures about the change in VaR models for its chief investment office, which invests the banks’ excess cash. The Federal Reserve and Office of the Comptroller of the Currency are examining why the change was made and whether it’s a sign of weakness in risk- management practices.
They’re asking because JPMorgan changed its calculation methods on Jan. 15 for the CIO as the unit was grappling with how to unwind stakes held by Bruno Iksil. The U.K.-based executive was dubbed “The London Whale” after his trades became so big that they distorted prices in an illiquid market, making it hard to get out of the positions.
So someone wants to know why the VaR got changed. Oh I don’t know, you think it could be because the old VaR didn’t match the market movement against JPM (that the London Whale positions induced without any historical precident)?
Not once in the three years before JPMorgan’s trading loss did the bank disclose a change in any risk models for specific trading desks, according to data compiled by Bloomberg.
Cold
JPMorgan isn’t alone in tweaking its risk models behind the scenes or employing discretion to calculate the figure. Goldman Sachs Group Inc. (GS) and Citigroup also make changes to their VaR models regularly, people with knowledge of the matter said.
Colder
When calculating VaR for an asset without a complete pricing history, traders and risk managers have to choose a “proxy” — an asset whose price moves are believed to be similar to those of the asset being modeled.
“The choice of proxy is a subjective judgment,” said Allen, now a consultant based in New York.
This is a total word to your mother moment.
Maybe Mr. Keoun is an economist?
Bloomberg, Ex-JPMorgan Trader Feldstein Wins In Betting Against Bank, here. Ok, BlueMountain, Saba, BlueCrest, and Hutchin Hill are in on the CDX side, what about the standard tranche counterparty?
The potential gains lured BlueMountain, Saba and other hedge funds including BlueCrest and Hutchin Hill Capital LP to buy more protection as Iksil continued offering to sell to brokers — even as it initially led to losses because the JPMorgan trader’s bets moved the index lower.
BlueCrest founder Michael Platt said in a May 21 interview with Bloomberg News that the $32 billion hedge fund traded in a “small way” to profit from the distortions.
Taleb, Prolog to his book due out Q4, here. Black Swan was a pretty good read. I expect no less from Antifragile.
Business Insider, NASSIM TALEB EXPLODES: JP Morgan’s Ina Drew Was Paid More Money Than Mob Boss John Gotti For Taking Risks With Our Money, here. Taleb’s anger followed by the Donna Summer tribute seems like a setup for the Gregory Brothers to autotune.
Zerohedge, Nassim Taleb Is Angry That Not Even John Gotti Got Paid As Much As JPM’s Ina Drew, here.
Team Firm Risk as we discussed before, in Team Firm Risk: 0 Taleb: 2Bn (halftime), this is on you.
Al Pacino, Any Given Sunday, here; or Clint Eastwood, here. Now we are going to have to endure a seemingly endless stream of Taleb’s gloating i-have-been-warning-you-about-VaR-for-years interviews; the FinQuant equivalent of the Icky Shuffle. Look Team Firm Risk, you all have seen It’s a Wonderful Life, right? Well every time a bank gets their bell rung, Taleb gets another Fox and Friends interview.
Naked Capitalism, JP Morgan Loss Bomb Confirms That It’s Time to Kill VaR, here.
One of the amusing bits of the hastily arranged JP Morgan conference call on its $2 billion and growing “hedge” losses and related first quarter earning release was the way the heretofore loud and proud bank was revealed to have feet of clay on the risk management front. Jamie Dimon said that the bank had determined that its value at risk model was “inadequate” and it would be using an older model. And no wonder. The Financial Times report contained this bombshell:
JPMorgan also restated its “value at risk”, a measure of maximum possible daily losses, of the CIO [the unit that executed the trading strategy that blew up] in the first quarter from $67m to $129m.
Lisa Pollack, ft.com/alphaville, Too Big To Hedge, here; and What Position Transparency, here.
“Synthetic credit portfolio”. That’s the book where the $2bn in mark-to-market losses took place for JP Morgan, according to an announcement made on Thursday. A result which has now cost them a their AA- rating from Fitch and landed them on negative outlook with S&P, as announced late on Friday.
FT Alphaville has analysed the credit trades that might be in that portfolio, in an attempt to reason through what may have gone on. The fact, however, remains that we know precious little. Why is that? Is this acceptable that after the financial crisis that this can happen to a bank, let alone a systemically important one like JP Morgan?
Got a buck that says you cannot find a Firm Risk person on 13 May 2012 who knows substantially more about the positions than Lisa Pollack.
Zerohedge, Double or Nothing: How Wall Street is Destroying Itself, here.
This fragile business model is in fact descended from the Martingale roulette betting system. Martingale is the perfect example of the failure of theory, because in theory, Martingale is a system of guaranteed profit, which I think is probably what makes these kinds of practices so attractive to the arbitrageurs of Wall Street (and of course Wall Street often selects for this by recruiting and promoting the most wild-eyed and risk-hungry). Martingale works by betting, and then doubling your bet until you win. This — in theory, and given enough capital — delivers a profit of your initial stake every time. Historically, the problem has been that bettors run out of capital eventually, simply because they don’t have an infinite stock (of course, thanks to Ben Bernanke, that is no longer a problem). The key feature of this system— and the attribute which many institutions have copied — is that it delivers frequent small-to-moderate profits, and occasional huge losses (when the bettor runs out of money).
BBC News magazine, Black-Scholes: The maths formula linked to the financial crash, here.
It’s not every day that someone writes down an equation that ends up changing the world. But it does happen sometimes, and the world doesn’t always change for the better. It has been argued that one formula known as Black-Scholes, along with its descendants, helped to blow up the financial world.
It doesn’t say if Scotland Yard had Scholes in for questioning yet. Oh, this story is sourced from Ian Stewart the math guy from Warwick.
Stewart says the lessons from Long-Term Capital Management were obvious. “It showed the danger of this kind of algorithmically-based trading if you don’t keep an eye on some of the indicators that the more conventional people would use,” he says. “They [Long-Term Capital Management] were committed, pretty much, to just ploughing ahead with the system they had. And it went wrong.”
Scholes says that’s not what happened at all. “It had nothing to do with equations and nothing to do with models,” he says. “I was not running the firm, let me be very clear about that. There was not an ability to withstand the shock that occurred in the market in the summer and fall of late 1998. So it was just a matter of risk-taking. It wasn’t a matter of modelling.”
Would it be a bad thing if John Meriwether and Myron Scholes attend a remedial applied maths course taught by Professor Stewart? Perhaps not, it could be awesome if there is You Tube video of the class.
Wired, Vint Cerf: We Knew What We Were Unleashing on the World, here.
Vint Cerf invented the protocol that rules them all: TCP/IP. Most people have never heard of it. But it describes the fundamental architecture of the internet, and it made possible Wi-Fi, Ethernet, LANs, the World Wide Web, e-mail, FTP, 3G/4G — as well as all of the inventions built upon those inventions.
Cerf did that in 1973. For most of you that’s probably 20 years before you even knew what the internet was. That’s why he’s known as the father of the internet and earned himself a Presidential Medal of Freedom. Cerf didn’t stop there — he went on to co-found the Internet Society (ISOC) and served as president of ICANN, the organization which operates the domain naming system.
PC Mag, Intel’s Ivy Bridge: 10 Things You Need to Know, here.
More overclockable. Supporting version 1.3 of Intel’s Extreme Memory Profile, real-time core ratio changes, and improved overrides for processing, graphics, and memory functions, Ivy Bridge offers options for tweaking your system’s performance over and above what you can get from either Sandy Bridge or Sandy Bridge Extreme CPUs. In our testing, we had no trouble pushing the Core i7-3770K from 3.5GHz to 4.6GHz using a stock fan and heat sink; with time, determination, and more aggressive cooling, you should have no trouble doing even better. You will, however, need a motherboard with the Z75 Express or Z77 Express chipset.
Slashdot, C/C++ Back On Top of the Programming Heap? here. Hammer Principle, Browse the Programming Language Rankings, here. How about the principle “This is a mainstream language” 14 out of 15 respondents picked Haskell over Standard ML.
Salmon, Argentina, Elliott, and the pari passu war, here. Argentina vs Elliott: It’s not about pari passu any more, here. Emerging Market traders always said these were the most interesting battles.
Anna Gelpern puts it well: “for the small but committed contingent of pari passu pointy heads, this is WorldCupOlympicMarchMadnessSuperBowl.” I’m one of the contingent, and I’ve been actively enjoying myself reading various appeals and amici briefs in the case of Elliott Associates vs Argentina. (Technically, it’s not Elliott Associates but rather NML, an Elliott sub-fund, but make no mistake: this is very much a fight between Argentina and the most famous vulture fund in the world.)
Elliott, which is run by the billionaire Republican activist Paul Singer, has suffered a rare and public loss with respect to its Argentina strategy. It bought up Argentine debt around the time the country defaulted, and then refused to enter into the country’s bond exchange, taking its chances in U.S. court instead. That, in hindsight, was a mistake: Argentina’s new bonds, turbo-charged with GDP warrants, performed extremely well. While its defaulted debt has gone absolutely nowhere.
When Elliott started litigating its defaulted debt a decade ago, it quite explicitly told the judge in the U.S. Southern District, Thomas Griesa, that it wouldn’t wheel out the most notorious and legally dubious weapon in its arsenal: the pari passu argument it used to devastating effect against Peru in 2000. In 2003, indeed, Argentina’s lawyers asked the court for a declaration that the argument was legally bonkers; the only reason that Griesa didn’t provide that declaration was that Elliott Associates — in line with all the other holdout creditors — said that it had no intention of making the argument, “at any time in the near or distant future”.
In fact, Elliott was just playing the waiting game — waiting, that is, for 91% of the other creditors to go away, persuaded by Argentina to accept its exchange offer. And then, after a decent amount of time — five years — it suddenly decided that it was going to attempt to use its rather odd pari passu argument after all.
Waiting that long held dangers, since it smells of what lawyers call “laches” — unreasonable delay in making a claim. But it was also quite smart, since at that point Elliott had been fighting Argentina in front of Judge Griesa for a decade, and Griesa was officially Fed Up with the whole thing and just wanted to make it go away.
Griesa’s orders (here here here) are notable for their lack of legal reasoning: Griesa is throwing his hands in the air, here, and basically punting the whole issue up to the appeals court. Each one is very short, certainly in comparison to the long, compelling, and clearly-argued amici briefs, let alone Argentina’s masterful, 84-page response. After reading that, and the briefs from the Justice Department and The Clearing House , it’s basically impossible to see how Griesa’s order can possibly be upheld on appeal.
Naked Capitalism, The Hidden Bank Time Bomb: Interest Rate Risk, here.
At the Atlantic Economy Summit in Washington last month, Sheila Bair fielded a question about the just-released results of the latest bank
stress tests. The former FDIC chief took pains to point out that they were an improvement over earlier iterations by virtue of keying off a truly dire economic scenario, but then ticked off a number of ways in which they fell short. One was in that they focused solely on credit risk, when historically, adverse interest rate moves have proven very effective in decimating the banking sector. Witness phase one of the savings and loan crisis, in which hasty deregulation and gimmickry in the early 1980s set up the crisis later in the decade, or the derivatives wipeout of 1994, in which an unexpected 25 basis point Fed funds increase created bigger losses than the 1987 crash, or the losses on US bond portfolios in 1997 and 1998, which among other things nearly wiped out Lehman.
The perils of interest rate
Chris Whalen, in his latest newsletter, argues that this risk is even nastier than it might appear. One way of mitigating interest rate risk is by holding shorter-dated instruments. The reason is that the more back-weighted your payments are, the more exposure you have to changes in interest rates.
Investors measure this sensitivity via duration. There are somewhat different ways to measure it. One is the weighted average of payments. That gives you a result than under most circumstances is very close to the price sensitivity of a bond to interest rate changes. At “normal” interest rates, a current coupon bond of just under 10 years will have a 10% sensitivity to interest rate changes.
But, as Whalen points out, this all goes haywire when interest rates are super low. So much of the value is in the repayment of principal and so little in the intervening interest payments that it pushes duration out and increases interest rate risk disproportionately. That effect may be further compounded by the fact that banks are desperate for yield and with the yield curve flatish, they are likely to be extending the maturity of their assets.’And of course, anyone holding mortgages will see them extend, since refis will halt and home sales will probably be depressed, since higher interest rates mean more expensive mortgages, which all other things being equal, means lower home prices.
