If short-term traders are structurally long, their dynamic hedging may have the effect of dampening market movements, producing zones of local stability. But where, as a group, they are structurally short, their dynamic hedging can sometimes amplify price movements, increasing volatility, if the market proves illiquid under stress. While I have set this out in a rather general way, it isn’t fanciful. There are examples of it going back over nearly twenty years: some involving the explicit writing of options; some implicit writing of options; and some arising from trading strategies that mimic optionality. For example, the 1987 equity market crash was exacerbated by the prevalence of portfolio insurance, a trading strategy akin to delta hedging an option: sell when prices are falling. A dynamic variant of a ‘stop loss’. Similar strategies are now a key feature of some Principal-Protected hedge fund investments, via so-called Constant Proportion Portfolio Insurance (CPPI). To preserve the nominal principal, the ‘guarantor’ will sell units in, say, a fund of funds as its value falls, and vice versa. I guess some assumptions are made about underlying liquidity, and that these are reflected in how such strategies are effected. 2  BIS Review 50/2005  In 1994, and again in 2003, hedging the negative convexity of US mortgage-backed securities amplified the rise in dollar bond yields, with some violence.3 The underlying factors here, of course, are that US mortgage borrowers have an option to prepay, so they are long options on mortgage interest rates.
Encik Abu Hassan Alshari Yahaya: Future proofing compliance – responsibility and response-ability Speech by Mr Encik Abu Hassan Alshari Yahaya, Assistant Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the 9th International Conference on Financial Crime and Terrorism Financing (IFCTF) "Future proofing Compliance: Responsibility and Response-ability", Kuala Lumpur, 5 October 2017. * * * It is a great pleasure for me to be here today among industry leaders and experts. As we approach the end of this conference, I would like to thank all of you for your participation and contribution in making this year’s IFCTF a success. I believe that the various sessions and the topics discussed in the past two days have provided significant insights and understanding towards strengthening our risk management and capabilities to mitigate the vulnerabilities from threats of money laundering and terrorism financing. I would like to commend CONG and AIF for the continuous effort and initiatives in enhancing the capacity and capability of the financial industry, to improve the industry’s response to financial crime and terrorism financing. As highlighted yesterday, countries are still facing fundamental challenges towards effective implementation of AML/CFT measures. Weak legal, regulatory and supervisory framework and inadequate risks understanding would have cascading effects, not just on compliance with international standards, but towards effective implementation of AML/CFT measures in achieving the intended outcomes.