Occupy the SEC: commenting on the Volcker Rule
One of the subgroups of the Alternative Banking group is an #OWS group called Occupy the SEC. Their goal is to make comments on the Volcker Rule before the public commenting period ends on January 13th, 2012.
At our last meeting we distributed a sheet where people put their email addresses and listed fields of expertise so that the people in Occupy the SEC could ask us specific clarifying questions about what the current version of the Volcker Rule says.
If you think you could have time to help them, please email them at firstname.lastname@example.org and tell them what your fields of expertise are. They are mostly looking for financial expertise and people who speak legalese, but anyone who is a good and careful reader will be super useful too.
My experience at Riskmetrics working with Value-at-Risk (VaR), where I was actually working on methodology questions of VaR usage for credit instruments like CDS, makes me pretty useful to these guys.
This morning I’ve been reading about the proposed risk reporting requirements for the “covered bank entity”. Basically they are required to report daily 99th percentile VaR. But left out are all other details, including:
- whether they should use parametric, historical, or MonteCarlo VaR methods,
- what their lookback period is (if historical)
- what their decay length is (if MonteCarlo)
- what exactly they need to admit as risk factors
- why they would ever use parametric VaR outside of stocks, since parametric VaR sucks outside of stocks.
They are also asked to report the skew and kurtosis of their daily PnL, but I believe are only required to report this for daily numbers on a quarterly basis, which means there’s no chance in hell those will be meaningful numbers.
How about this instead: report all three kinds of VaR, with a year lookback for historical VaR, and with various decay lengths for MonteCarlo VaR. Specify the risk factors and ask for each risk factor’s sensitivity (which is like a partial derivative if we are using parametric VaR) as well as min and max returns (if we are using historical VaR). Report skew and kurtosis using daily numbers with 2 years of data.
Even better if they abandon this altogether and go for something benchmarked as I discussed in this post.
There seems to be no stipulated need to report counter-party exposure or risk, at least in this section (Appendix A). This seems particularly egregious considering the current situation, namely that we are waiting for European sovereign debt defaults to cause broken CDS hedges through collapsing counterparties. We know this would happen, but we somehow don’t want to know more details.
This is only a few pages of the Volcker Rule, though, out of I think something like 550. We need your help for sure!