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Crowd trouble: the FRTB's war on basis risk

Flexibility is the foundation of the market-making business. A dealer’s ability to hedge single-stock positions with indexes, Eonia with Euribor, or a nine-and-a-half-year-swap with a 10-year swap, is how it manages risk while making money. But under new trading book capital rules, this flexibility comes with an increased cost – and there are growing concerns about the second-order effects. The Fundamental review of the trading book (FRTB) punishes with extra capital anything that does not offset…

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