The history of financial markets particularly the recent subprime crisis and its resulting social backlash has led politicians and regulators worldwide to enforce stricter regulations on the financial industry.
Whether in the form of market, reputational, or legal risk, risk management has taken center stage in the financial sector over the past few years, with no signs of diminishing importance. EQRC has been at the forefront of regulatory changes, addressing risks ranging from market risk—covering both linear [for linear products ( download relevant paper) and non-linear products ( download relevant paper)] to reputational and legal risks. The latter are particularly associated with violations of the Client Best Interest Rule and the Misleading Statements and Actions rules ( download relevant paper), which broadly state that individuals working for authorised financial firms and selling financial products must act with integrity and avoid misleading clients. The duties of an Approved Person are outlined in Section 2 of the Financial Services and Markets Act (FSMA 2000), which shares the following four statutory objectives with EQRC: Maintaining Confidence in the Financial System, Promoting Public Understanding, Protecting Consumers and Reducing Financial Crime.
EQRC’s Statements of Principle for its consultants align with the FCA’s definition for Approved Persons, emphasising: Integrity, Skill, care, and diligence, Proper standards of market conduct, Transparency in dealings with regulators, Effective business organization, Diligence in management and Compliance with regulatory requirements.
Beyond these well-established financial industry principles, EQRC has also taken proactive steps to highlight emerging risks that are often overlooked yet equally critical to the industry’s stability. Its pioneering work on these topics was prominently featured as the cover story of Wilmott magazine ( download relevant paper).
“the misleading value of measured correlation”.
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“UTOPE-ia”.
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“the non misleading value of inferred correlation, an introduction to the cointelation model”.
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“The strength of a nation derives from the integrity of the home.”
– Confucius
“Subtlety may deceive you; integrity never will.”
– Oliver Cromwell
“The supreme quality for leadership is unquestionably integrity. Without it, no real success is possible, no matter whether it is on a section gang, a football field, in an army, or in an office.”
– Dwight D. Eisenhower
The first step in litigation, is to contact us in order to explain what the mathematical argument at stake is so that we can give you our impartial feedback.
The second phase, the pre-trial, requires that each parties interact with each other and with the help of a potential mediator to understand the technical argument so as to allow a potential early settlement.
Litigation takes only place if settlement has not ocured. During the trial, the judges need to hear the different witnesses and experts to assess the validity of the scientific argument as well as its legal & political ramifications.
At this stage, the judges have deliberated and make their decision public. Whether you have won or lost, your solicitor will tell you what to do and how we can help.
Within the framework of the financial industry, when representing relationships between assets, correlation is typically used. However, academics have long since questioned this method due to the plethora of issues that plague it. Indeed, it is thought that some components of cointegration are a natural replacement in some of the cases as it is able to represent the physical reality of these assets better at different timescale. However, despite this general academic consensus, financial practitioners refuse to accept cointegration as a better tool, or even the lesser of two evils.
EQRC has attempted in the past to explain this bias, specifically focusing on the various consequences of model selection considering the new and challenging regulatory environment and suggests a practical replacement hybrid alternative to both cointegration and correlation that it has named cointelation.This concept comes together with growing evidence for power law-type scaling of correlation with time, a concept rooted in the original study by Benoit Mandelbrot on concentration of risk. We have also completed the cointelation model recently introduced via a statistical test, which uses measured correlation in different time gaps. We also provide an approximation of the expectation in the change in measured correlation via these various time steps and use our findings in order to introduce the concept of inferred correlation and the term structure of correlation. We finally illustrate our findings through the example of the relation between oil and BP, and present a few potential applications in the financial industry ( download relevant paper 1, download relevant paper 2).
In a ever more intricate social and financial network, the impact of the subprime crisis and the resulting uproar has pressured politicians and regulators to find rapidly conservative solutions that would address the liquidity crisis which was the signature of that financial crash. The first proposal was to push for higher capital requirements on the financial institutions so that in situations in which a big loss occurs, each institution has enough reserves to pay its dues even considering low probability events and leveraging. However, these new capital requirements have had for immediate side effect the closure of many profitable desks like in high volatility markets such as commodities. Given that the capital requirements are directly linked to Initial Margin calculation the regulators have pressured the Clearing Houses to come up rapidly with methodologies that would alleviate some of these capital requirements through diversification benefits. Cross margining between types of assets (Equities, Commodities, Rates, FX) and form of the asset (linear products, options) are currently the best response to this call for diversification benefits encouraged by the regulators. However, its implementations has proved much more challenging than expected. The Fundamental Review of the Trading book (FRTB) is at the core the latest Basel committee of banking supervision. EQRC is currently very involved in these new challenges exposed by the regulators ( download relevant paper 1, download relevant paper 2).