AI in practice, EU clearing and post-Libor hedging

The week on Risk.net, February 8–14, 2020

7 days montage 140220

Man and machine need each other – Systematica CEO

“The errors made by humans and robots are different,” says Leda Braga

BNP leads a comeback for Europes clearers

Brexit, leverage ratio tweaks and concentration fears could help European banks compete with US FCMs

Why the numbers don’t add up for post-Libor hedge accounting

Experts raise concerns over IASB’s Phase II plans to move on from Libor


COMMENTARY: Keep an eye on AI

New applications for artificial intelligence (AI) technologies such as machine learning continue to surface – making it ever more important for regulators and risk managers to focus on explainability, even for internal-facing uses.

The idea of fully automated trading or asset management has never become reality, any more than the idea of widespread lights-out manufacturing. The coming reality is closer to ‘assisted human operations’ – the teaming of human and machine to cover each other’s weaknesses. And often these hybrid teams are aimed at being used internally rather than externally – processing data, analysing returns and classifying assets, rather than predicting prices and directing investments. Ethical algos are also helping quant managers handle the volumes of new data associated with investment strategies involving environmental, social and governance considerations.

But all this rapid evolution increases the importance of good oversight – internal and external – of machine learning systems. Explainability remains key for regulators, and it’s vital that both they and banks’ own internal controls do not take the spotlight off machine learning simply because it is not making decisions that directly affect customers or the market.

Biased lending decisions and disruptive trading have immediate and visible impacts; long-running errors in data processing or portfolio construction will be less obvious but potentially just as disruptive. Regulators need to keep their eyes on the AI behind the scenes; so do the banks and asset managers using them.


STAT OF THE WEEK

Under the severely adverse scenario drafted by the Fed for this year’s Dodd-Frank Act Stress Tests and Comprehensive Capital Analysis and Review (CCAR), real US GDP is projected to shrink about -8.5% from its pre-recession peak. In contrast, the adverse scenario for the European Banking Authority tests projects a start-to-stress real GDP decline of -4.2% for the Eurozone, with a US GDP decline of just -4.8%.

 

QUOTE OF THE WEEK

ESG is changing how capital is being raised. It is changing how capital is being allocated and how investment decisions are being made. ESG is not a theme or a trend or an investment style. It’s a disruption” – Lindsay Patrick, RBC

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