21 March 2024
“Only when the tide goes out can you see who’s swimming naked,” as Warren Buffett said in reference to the unknown credit and financial risks across the industry.
When the PRA and the Federal Reserve outlined a set of expectations following the default by Archegos Capital Management in 2021, which resulted in reported losses in excess of $10billion, they raised a number of concerns. They considered the industry had not learned from the resulting crisis. The approach has been to seek to ‘encourage’ banks to improve protection against exposure and improve counterparty risk management.
In the letters addressed to CEOs in December ’21 and CROs in October ’23, the regulators were primarily focused on cash prime brokerage and synthetic equity financing. However, their scrutiny has now expanded, with regulators urging banks to assess all sales and trading activities. It appears that similar risk management issues are being observed across various areas involving counterparties.
As part of this assessment, banks will be required to review and benchmark:
This creates challenges for Prime Brokers on a number of fronts and is further exacerbated for GSIBs by the sheer volume & complexity of existing agreements. Drivers include the agreement nature,, many of which are intricate and bespoke; the complex entity structures and the interconnected nature of terms across agreements such as (but not limited to) NAVs, EODs, Margin provisions and Termination Rights.
In summary, prime brokerage requires comprehensive support from a diverse set of stakeholders and business units including risk management, legal, technology and data officers. The availability and quality of data are paramount for meeting regulatory expectations, effectively managing counterparty risk, and promptly responding to market events.
Given the breadth of the regulators’ expectations and the shortened timelines they’ve set, banks require experienced partners and robust technology to meet these demands effectively. Technology solutions must offer the following capabilities:
Supporting several top Prime Brokers as they start addressing regulators, Likezero’s clients are starting to realise the significant benefits that go well beyond the regulators’ expectations.
With Likezero’s software, in addition to client agreements, legal clauses, and financial data being digitised and made easily and fully accessible for query and reporting, banks are also gaining crucial insights to bolster their business. This includes being able to assess various stress scenarios like simulating credit downgrades, evaluating default risks, conducting liquidity stress tests, analysing counterparty risks, and reviewing regulatory compliance in a more efficient manner.
Think of it this way: When the tide goes out again, Likezero won’t just be covering your modesty, we will also be your armbands and goggles for when the tide comes back in.
