LONDON -- Bankers active in derivatives appear to be heeding recent calls from central bankers for close monitoring of risk positions.
This week Barclays de Zoete Wedd will increase the frequency of the tests it conducts to monitor the risk of its derivatives books, managing director Paul Ellis said.
Analyzing the Indicators
"At the moment we do stress testing on a weekly basis but we are going to do it on a daily basis," he said. Stress tests analyze how a derivative's value will move with changes in such factors as the underlying price and volatility.
"For instance [when conducting a stress test] you'd look at what would happen if the yield curve moves by 150 basis points, foreign exchange rates went down by 5%, and implied volatity goes up," Ellis said.
"The risks don't suddenly appear but [stress testing] highlights where perhaps you are most vulnerable," he said.
He sees such stress testing as a crucial way to help ease the concerns of central bankers, epitomized by today's comments by the Bank for International Settlements, or BIS.
Among other things, BIS called for "more appropriate measures for the exposures which derivatives actually entail."
Volatility, Rate Rises Prompt Focus
Central bankers have focused on the risks associated with derivatives in recent months following four months of unprecedented volatility in global bond markets after a series of interest rates hikes by the U.S. Federal Reserve.
Their concerns have also been heightened by news of losses suffered by firms after entering into derivatives trades.
Bankers involved in the derivatives markets repeatedly stress these corporate losses have resulted from unauthorized trading rather than badly designed derivative products.
"When you look at those companies [that have suffered losses], there was nothing fancy or complex going on. Users of derivatives must be properly aware of their authorization," he said.
Awareness of Positions Seen as Key
Jean-Francois Nguyen, senior executive director at NatWest Markets thinks one key to monitoring derivatives positions successfully is to ensure senior managers are always aware of derivatives positions.
He said this is true at NatWest, adding that the U.K. bank has no immediate plans to alter the frequency, or the way, it monitors its derivatives exposure.