Category Archives: BIS

(BBC) No single factor behind sterling flash crash, BIS says

(BBC) October’s flash crash in sterling was caused by several factors – including the time of day – according to a report by the international banking body, the Bank for International Settlements.

In the early hours of 7 October, the pound fell by about 9% against the dollar – an abnormally large swing in two such widely traded currencies – before then largely recovering.

The BIS says there were no significant losses suffered by traders.

But it says lessons should be learned.

The BIS report, which drew on detailed analysis by the Bank of England, says the conditions for such a move were created by the lack of sterling dealers in the market at the time of day.

The trade took place in Asian markets, at a time of day when key sterling counter traders in London and other important Western markets are not operating.

Vulnerable

The BIS does not point to an actual event or piece of news for causing the crash, but reports at the time suggested a headline in the Financial Times quoting French president Francois Hollande pressing for a “hard Brexit”, an outcome commonly thought to preclude a smooth transition, prompted some selling.

The flurry of trading, whatever the cause, included automatic deals.

Some of these were stop-loss orders – designed to simply sell a holding that has reached a price below which it will lose money for the investor – and algorithmic trades, which can be triggered by a host of factors, including, it is thought, certain types of news announcements.

The BIS said: “The report concludes that the time of day played a significant role in making the sterling foreign exchange market more vulnerable to imbalances in order flow.

Traders at BGXImage copyrightREUTERS

“Significant demand to sell sterling to hedge options positions and the execution of stop-loss orders as the currency depreciated also had an impact. The presence of staff with less expertise in the suitability of particular algorithms for the market conditions appears to have amplified the movement.”

When the sudden fall happened, one theory was that it was a mistake, a so-called “fat finger” trade.

Others blamed the automated nature of the market.

The BIS report says these sudden moves appear to be happening more frequently as the market becomes faster and more automated, and market participants should consider how to ride these out.

It says there are direct lessons from the flash event.

Its Foreign Exchange Working Group is developing the new code of conduct for currency markets, the FX Global Code.

It wants market participants to consider the disruptive consequences of their trading activity, governance around algorithmic execution of trades, and how market participants might best determine the low (or high) point of pricing in a flash event.

“Since such events have the potential to undermine confidence in financial markets and impact the real economy, it is important for policymakers to continue to develop a deeper understanding of modern market structure and its associated vulnerabilities,” said Guy Debelle, chairman of the BIS’s Markets Committee.

(BBC) Global banking watchdog warns over Chinese banks

(BBC)

100 YuanImage copyrightGETTY IMAGES

Risks of a Chinese banking crisis are mounting, according to a warning indicator from the banking industry’s global watchdog.

A key gauge of stress in the banking sector is now more than three times above the danger level, the Bank for International Settlements (BIS) said in its latest quarterly review.

China’s credit-to-GDP gap hit 30.1 in the first quarter of 2016, it said.

The BIS considers a credit-to-GDP gap of 10 to be a sign of potential danger.

A year ago the BIS quarterly review put the figure for China at 25.4.

The BIS calculates the gap by looking at borrowing in relation to the size of the economy, and comparing that with the long-term trend of that ratio.

When the two start to diverge, the BIS argues, a banking crisis could be on the way.

The BIS has a central position in global finance as it provides banking services to central banks and monitors the international flow of money and credit.

The health of China’s banking sector has long been a source of concern for financial markets.

Since the financial crisis of 2007-2008 there has been a boom in credit as the Chinese government has attempted to spur flagging growth.

But some of that lending has not been productive and the IMF estimates that loans worth $1.3 trillion are at risk of default.

However, as the Chinese banking system is largely owned or controlled by the government, analysts say the government would bail out the banking sector if necessary.

Brexit recovery

In its latest quarterly review, the BIS also said the markets has shown resilience following the UK’s vote to leave the European Union.

“The speed of the recovery took many by surprise, given the political and economic uncertainty that the vote had triggered,” said Claudio Borio, head of the Monetary and Economic Department at the BIS.

But he warned that, despite recent gains, global financial markets are in a sensitive state.

“There has been a distinctly mixed feel to the recent rally – more stick than carrot, more push than pull, more frustration than joy.

“This explains the nagging question of whether market prices fully reflect the risks ahead. Doubts about valuations seem to have taken hold in recent days. Only time will tell,” Mr Borio said.