Willi Brammertz and Allan I. Mendelowitz
This paper aims to demonstrate the importance of a cash flow generating standard for individual financial contract level data and the ability to create such a standard.
Abstract
Purpose
This paper aims to demonstrate the importance of a cash flow generating standard for individual financial contract level data and the ability to create such a standard.
Design/methodology/approach
The authors analyze the importance for such a standard of software that turns natural language contracts into cash flow generating algorithms; a data dictionary that standardizes contract terms; and access to variables that represent the state of the world (e.g. market risk, counterparty risk, etc.) that affect contractual obligations.
Findings
The ability to realize benefits from the use of such a contract level algorithmic standard depends on the following: making the standard’s software open source; fully testing the software to have complete confidence in its accuracy; and enabling the software to use of a wide range of models of various sources of risk (market, credit and behavior risk) to support forward-looking analysis. Such a standard would solve the disconnect that exists in financial firms between the representation of financial contracts for transaction processing and analysis. The ACTUS Financial Research Foundation is building, testing and making available such a standard that represents almost all financial contracts extant in markets.
Practical implications
The adoption of such a standard would reduce the costs of operations of financial firms, provide the computational infrastructure for more effective regulatory oversight, reduce regulatory reporting costs and improve financial market transparency. It would also enable the assessment of systemic risk by directly quantifying the interconnectedness of firms.
Originality/value
This is a new approach to financial analytics that clearly separates the deterministic components of finance, which can be standardized from the stochastic elements that cannot be standardized.
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A regulatory wave will follow the current financial turmoil. The purpose of this paper is to warn that although new regulation is necessary, there is a danger of strangulation of…
Abstract
Purpose
A regulatory wave will follow the current financial turmoil. The purpose of this paper is to warn that although new regulation is necessary, there is a danger of strangulation of the financial market which can only be avoided with a paradigm shift in the way data are collected and used.
Design/methodology/approach
The paper is based on more than 20 years of experience in the field of all types of financial analysis within banks. The idea has been laid down in a doctoral thesis which has been applied in more than 200 banks successfully, including the acceptance by regulators.
Findings
Regulators in order to be successful and to regain eye level contact with banks have to use similar techniques as used today within risk management departments or related areas. In addition, however, regulators have to enforce standards especially for the representation of financial contracts, which are called contract types (CT). This would create the long missing international financial language that can be understood by all market participants improving not only the communication between banks and regulators, but also inside the banking sector and the investor community. Within single banks, it would help overcoming the now prevalent silo architecture and mentality.
Practical implications
Such a standard would increase the quality of information drastically and reduce the cost in similar magnitudes not only for the regulator but also for the whole financial community as a whole. The “lemon problem” (Akerlof) responsible for much of the present problems could be drastically reduced.
Originality/value
This paper closes an important gap towards the development of an international financial language via a standardized parametric representation of financial contracts (CT) is closed.
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Latif Cem Osken, Ceylan Onay and Gözde Unal
This paper aims to analyze the dynamics of the security lending process and lending markets to identify the market-wide variables reflecting the characteristics of the stock…
Abstract
Purpose
This paper aims to analyze the dynamics of the security lending process and lending markets to identify the market-wide variables reflecting the characteristics of the stock borrowed and to measure the credit risk arising from lending contracts.
Design/methodology/approach
Using the data provided by Istanbul Settlement and Custody Bank on the equity lending contracts of Securities Lending and Borrowing Market between 2010 and 2012 and the data provided by Borsa Istanbul on Equity Market transactions for the same timeframe, this paper analyzes whether stock price volatility, stock returns, return per unit amount of risk and relative liquidity of lending market and equity market affect the defaults of lending contracts by using both linear regression and ordinary least squares regression for robustness and proxying the concepts of relative liquidity, volatility and return constructs by more than variable to correlate findings.
Findings
The results illustrate a statistically significant relationship between volatility and the default state of the lending contracts but fail to establish a connection between default states and stock returns or relative liquidity of markets.
Research limitations/implications
With the increasing pressure for clearing security lending contracts in central counterparties, it is imperative for both central counterparties and regulators to be able to precisely measure the risk exposure due to security lending transactions. The results gained from a limited set of lending transactions merit further studies to identify non-borrower and non-systemic credit risk determinants.
Originality/value
This is the first study to analyze the non-borrower and non-systemic credit risk determinants in security lending markets.
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This paper aims to present a recent history of developments and innovations that, along with advances in information technology, have caused fundamental changes in the way that…
Abstract
Purpose
This paper aims to present a recent history of developments and innovations that, along with advances in information technology, have caused fundamental changes in the way that financial risk is created, transformed, transported and extinguished in modern financial intermediation systems. A review and critique of the global supervisory response to these developments is presented.
Design/methodology/approach
A bottom-up approach to the capture, recording, disaggregation, re-composition and measurement of new, standardized, basic elements of risk that the authors refer to as risk quanta is proposed.
Findings
This approach provides a clearer understanding of the financial world that the people live in today and creates a robust information platform to build innovations, advancements and economic growth in the future.
Practical implications
This approach provides decision-makers with a clearer understanding of the financial world that the people live in today and creates a robust information platform to build innovations, advancements and economic growth in the future.
Social implications
This approach provides financial market participants and the public with a clearer understanding of the financial system and creates a robust information platform to build innovations, advancements and economic growth in the future.
Originality/value
This approach is more comprehensive unlike current international proposals for a global financial risk framework.