As dealers have slid down the ratings spectrum in recent years, options the industry gave away for free when in better health have become painfully relevant, forcing banks to confront the latest in a long line of post-crisis pricing challenges – the replacement valuation adjustment (RVA). It may be a challenge too far.
“They’re horrible,” says the head of rates trading at one large European bank. “We have no idea how to price them or manage the risk associated with them. All I know is that if we get downgraded to a certain point and our counterparties choose to exercise the option, we are going to lose a lot of money.”
The question is how much. The options, known as downgrade triggers, allow a client to terminate a trade when a counterparty hits a certain rating level and also force that party to pay for a replacement – but banks have no way of knowing how much a new dealer might charge to enter into the trade. As a rule of thumb, one trader that has replaced other banks says a downgraded dealer might be gouged for up to 10% of a trade’s net present value.
This, of course, is the law of the jungle – and traders generally do not cry about that. What makes downgrade triggers different is the systemic risk they could present in markets where they are common, and where trading is concentrated in the hands of a small number of rtls – parts of the inflation swap market, for example. Dealers and clients alike worry the downgrade of a large player in this space, and subsequent mass termination of contracts, could overwhelm the market’s ability to replace the risk.
In this scenario, traders warn the 10% rule of thumb goes out of the window – losses could be many times larger than expected. Sweeping downgrades for dealers as a whole could have a similar effect – forcing affected banks to pay their stronger peers to take on trades at a time when nobody wants to trade at all.
As a result, dealers are doing two things they would normally walk over hot coals to avoid – some are turning away business, and others are calling on regulators for help.
“If regulators are serious about systemic risk, then they should seriously look at not allowing these triggers to exist,” says one head of interest rate structuring at a European bank in London. “Calculating an RVA number will be meaningless as any number computed will be too low and wrong. There is not a lot you can do about it, especially in one-way or closed markets. It is much better to just forbid portfolio rating triggers in derivatives contracts – especially in dynamic portfolios – as they are a blunt source of systemic risk.”
Tim Blake, head of fixed-income department portfolio management at Credit Suisse in New York, says the bank no longer writes new business containing downgrade triggers. “We made the decision that we wanted to stay away from that kind of business. The risks can be unacceptable,” he says. And Credit Suisse is not alone. One other, smaller European dealer says it has the same policy, while at least three other banks claim to have imposed strict limits on the number of swaps they will accept with downgrade triggers.
The second issue is that most dealers believe there is a strong correlation between the risk of a bank’s own downgrade and the downgrade of the rest of the Street. A counterparty may be less likely to exercise the trigger if dealer ratings are all slipping, but if it does so the bank will be paying for a replacement trade in stressed conditions, which is likely to significantly inflate the bid-offer spread.
On uncollateralised trades, dealers fear the replacement cost would be even bigger. The pool of willing counterparties for these swaps has shrunk since the crisis, because of the higher funding and capital charges involved, and this could be exacerbated in the event of widespread downgrades. For collateralised trades, modelling is harder still because each bank quoting will do so on the basis of its own credit support annex – the industry standard document governing bilateral collateral posting, which determines what discount rate should be used.
Finally, RVA should take into account the possibility that the new trade will also incorporate a downgrade trigger and that quoting banks may want to insulate themselves by charging an RVA premium, and that this premium needs to reflect the same fact, and so on, in a dizzying, never-ending cascade of downgrades and replacement charges, each of which would be determined by the same incalculable risks that are contained in the first.
The bottom line is that termination costs can be high, but there is no way of confidently putting a number on them – RVA resides in the land of informed guesses, ballpark figures and back-of-the-envelope calculations. It’s not the kind of thing a dealer is generally happy to quote to a client or explain to a risk manager.
“On a trade with a mark-to-market value of, say, $100 million, a general rule is that firms will take you for $5 million–10 million, just because they can. And we’ve seen this done. We have replaced people, it’s an opportunity to profit,” says one derivatives trader at a European bank.
It can be more painful than that, too. Peter Shapiro, managing director at independent swap adviser Swap Financial, which advises governments, government agencies and non-profit organisations, says he has advised on close-outs in which local US government entities were holding heavily out-of-the-money swaps and the banks were paying to step in as replacements often quoted at steep discounts.
All these issues are magnified in illiquid, concentrated markets – and a number of traders point to the long-dated, LDI-driven inflation swap market in the UK as a prime example. The market is dominated by five or six players, they say, and triggers are a common feature of these trades – so, if one of the bigger houses is downgraded, all hell could break loose.
“Rating triggers are, by their nature, wrong-way risk and are hard to quantify. But even more problematic is when these triggers are being used in a space where the underlying product flow is systemic. All banks will be same way round and a trigger will then catapult the bid-offer to unknown but most likely extreme levels – even more so when liquidity and capacity is also a constraint. Inflation and exotics markets are exposed to this kind of risk. We think this is a source of systemic risk. It is being used and pushed by pension funds and we are trying to dissuade the community from relying on these triggers,” says Guido Hebert, global head of rates structuring at HSBC in London.
The UK inflation swap market is intensely competitive, with bid-offer spreads typically between 2 and 4 basis points, traders say. But in stressed market conditions, the spreads can get as wide as 10bp, according to a trader at a large LDI manager. For a ￡10 billion inflation swap portfolio with an average maturity of 20 years and a ￡20 million sensitivity to a 1bp change in inflation – known as IE01 – this means paying the full bid-offer spread (5bp from mid-market) would result in a cost of ￡100 million.
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Monday, September 2, 2013
Mental Health Stigma
Four years ago this month I returned from Iraq, which was sort of my last big mission as a military psychologist before "becoming a civilian." As a psychologist I was interested in trauma and suicide long before my deployment, but there's something very different about listening to a Soldier tell the story of his buddy's death while he's still lying in a hospital bed having fragments of metal removed from his leg as compared to hearing the same story in your clinic in the U.S. two years after the fact. It was also in Iraq that I first stood over the body of someone who had died by suicide, feeling a mixture of helplessness, grief and anger; an experience that had, for me as a suicidologist, been merely an intellectualized concept. Four years ago, psychiatric disorders and suicide became personal to me.
Suicide is the fatal outcome of psychological injury. I should stress, however, that not all psychological injuries sustained by military personnel and veterans occur during deployments. For many of the service members and veterans I've worked with, the psychological injuries occurred during childhood at the hands of an abusive or demeaning parent; for others it was sustained within the context of a recent breakup or a financial crisis. Indeed, more than half of service members who die by suicide never deployed or saw combat. The good news is that we have very effective treatments for the full range of psychological injuries that lead to suicide. The bad news is that very few service members or veterans will receive them.
Clinic-based mental health services have been expanded dramatically for service members and veterans over the past decade across both the public and private sectors. Mental health treatment is arguably more accessible and affordable for service members and veterans now more than ever, due in large part to community mental health professionals and agencies offering free or significantly reduced-cost services. Although admirable, these efforts are not enough, and too many psychological injuries remain untreated.
One of the primary problems is that the expansion of mental health services has largely occurred in traditional, clinic-based settings that are unlikely to be accessed by most service members and veterans due to pervasive mental health stigma. Only a very small proportion of real time Location system who die by suicide (16%) visited a mental health care professional within the month preceding their deaths. Despite our decades-long battle with mental health stigma among service members and veterans, we have yet to see much success, primarily because we have failed to consider the issue of mental health treatment and stigma from within the context of the military culture. In the military, we value strength, mental toughness, elitism and self-sufficiency, but the culture of mental health is deficiency-oriented and values emotional vulnerability, which contradicts the core identity of many service members and veterans. We mental health professionals need to adopt a multicultural approach to working with service members and veterans, and to change how we deliver our services to better fit with military cultural norms, instead of asking service members and veterans to abandon their identities and conform to our standards.
From my perspective as a mental health professional, an even bigger tragedy is the realization that when service members and veterans do overcome mental health stigma and access care, they are still unlikely to receive the best treatments available. This is not a DOD or a VA problem; this is a problem of our mental health care system as a whole in the US, which continues to perpetuate the myth that all psychological treatments are equally effective, and that any treatment is better than no treatment. What we actually know, however, based on decades of research, is that trauma victims who receive prolonged exposure (PE) or cognitive processing therapy (CPT) for PTSD are three to four times more likely to experience full remission from PTSD. These better outcomes occur regardless of the trauma, whether rape, violent assault or combat. Early findings further suggest that PE and CPT reduce suicidal ideation among military personnel with PTSD. And just within the past month, preliminary data presented at the American Psychological Association's annual convention indicate that brief cognitive behavioral therapy (BCBT) for suicidal military personnel contributes to a 50% reduction in suicide attempts and significant reductions in PTSD symptoms as compared to traditional mental health care approaches. In short, some treatments work better than others, and are more effective at helping service members and veterans.
For many of us, the service members and veterans who are suffering from these psychological injuries are family members and friends. And some of them are dying from their injuries. Improved access to mental health care without improved quality of care will do little to prevent suicide among service members and veterans. As mental health professionals we must therefore commit ourselves individually and collectively to learning and using these better treatments that we know can help service members and veterans live lives that are worth living. It's okay for us to change.
But what I've learned along the way is that a joint honours student needs double the passion, patience and perseverance required to study a single honours degree.One of the first hurdles you have to overcome is logistics. Working with two academic departments can result in clashing deadlines, twice the staff to get to know and double the feedback sessions.
Rafe Hallett, director of induction in history at the University of Leeds, says: "The first six months of study can be a struggle, as the joint honours student adapts to the demands of two communities and two discourses of knowledge."They can sometimes feel stuck in limbo between two 'homes' and feel envious of the apparent simplicity of single honours students' timetables, contexts and communities."
Hayley Reid, a classics and English student from the University of Leeds, found dividing her time and attention between two schools was more trouble than it was worth: "It was one of the biggest mistakes I've made at university."Reid feels she doesn't properly belong to either of her departments: "I've chosen to focus more on the English side of things, but my parent school is classics. I feel like I'm floating in some sort of subject limbo where I'm neither an English student nor a classics student."
Read the full products at http://www.ecived.com/en/!
Suicide is the fatal outcome of psychological injury. I should stress, however, that not all psychological injuries sustained by military personnel and veterans occur during deployments. For many of the service members and veterans I've worked with, the psychological injuries occurred during childhood at the hands of an abusive or demeaning parent; for others it was sustained within the context of a recent breakup or a financial crisis. Indeed, more than half of service members who die by suicide never deployed or saw combat. The good news is that we have very effective treatments for the full range of psychological injuries that lead to suicide. The bad news is that very few service members or veterans will receive them.
Clinic-based mental health services have been expanded dramatically for service members and veterans over the past decade across both the public and private sectors. Mental health treatment is arguably more accessible and affordable for service members and veterans now more than ever, due in large part to community mental health professionals and agencies offering free or significantly reduced-cost services. Although admirable, these efforts are not enough, and too many psychological injuries remain untreated.
One of the primary problems is that the expansion of mental health services has largely occurred in traditional, clinic-based settings that are unlikely to be accessed by most service members and veterans due to pervasive mental health stigma. Only a very small proportion of real time Location system who die by suicide (16%) visited a mental health care professional within the month preceding their deaths. Despite our decades-long battle with mental health stigma among service members and veterans, we have yet to see much success, primarily because we have failed to consider the issue of mental health treatment and stigma from within the context of the military culture. In the military, we value strength, mental toughness, elitism and self-sufficiency, but the culture of mental health is deficiency-oriented and values emotional vulnerability, which contradicts the core identity of many service members and veterans. We mental health professionals need to adopt a multicultural approach to working with service members and veterans, and to change how we deliver our services to better fit with military cultural norms, instead of asking service members and veterans to abandon their identities and conform to our standards.
From my perspective as a mental health professional, an even bigger tragedy is the realization that when service members and veterans do overcome mental health stigma and access care, they are still unlikely to receive the best treatments available. This is not a DOD or a VA problem; this is a problem of our mental health care system as a whole in the US, which continues to perpetuate the myth that all psychological treatments are equally effective, and that any treatment is better than no treatment. What we actually know, however, based on decades of research, is that trauma victims who receive prolonged exposure (PE) or cognitive processing therapy (CPT) for PTSD are three to four times more likely to experience full remission from PTSD. These better outcomes occur regardless of the trauma, whether rape, violent assault or combat. Early findings further suggest that PE and CPT reduce suicidal ideation among military personnel with PTSD. And just within the past month, preliminary data presented at the American Psychological Association's annual convention indicate that brief cognitive behavioral therapy (BCBT) for suicidal military personnel contributes to a 50% reduction in suicide attempts and significant reductions in PTSD symptoms as compared to traditional mental health care approaches. In short, some treatments work better than others, and are more effective at helping service members and veterans.
For many of us, the service members and veterans who are suffering from these psychological injuries are family members and friends. And some of them are dying from their injuries. Improved access to mental health care without improved quality of care will do little to prevent suicide among service members and veterans. As mental health professionals we must therefore commit ourselves individually and collectively to learning and using these better treatments that we know can help service members and veterans live lives that are worth living. It's okay for us to change.
But what I've learned along the way is that a joint honours student needs double the passion, patience and perseverance required to study a single honours degree.One of the first hurdles you have to overcome is logistics. Working with two academic departments can result in clashing deadlines, twice the staff to get to know and double the feedback sessions.
Rafe Hallett, director of induction in history at the University of Leeds, says: "The first six months of study can be a struggle, as the joint honours student adapts to the demands of two communities and two discourses of knowledge."They can sometimes feel stuck in limbo between two 'homes' and feel envious of the apparent simplicity of single honours students' timetables, contexts and communities."
Hayley Reid, a classics and English student from the University of Leeds, found dividing her time and attention between two schools was more trouble than it was worth: "It was one of the biggest mistakes I've made at university."Reid feels she doesn't properly belong to either of her departments: "I've chosen to focus more on the English side of things, but my parent school is classics. I feel like I'm floating in some sort of subject limbo where I'm neither an English student nor a classics student."
Read the full products at http://www.ecived.com/en/!
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