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16 May 2014

FCA/Lawton: The new market infrastructure

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David Lawton, Director of Markets at FCA, delivered the keynote speech at the Economist Bellwether Conference. Firms need to adapt their business models to meet regulators’ and policy-makers’ expectations and put customers at the heart of their businesses, he said.

With the new regulatory framework coming into place, there will be a significant period of adjustment and change for the structures of capital markets themselves, including the firms and trading venues which operate within them. Over a period of time, firms will have to adjust to the new expectations on them and gear themselves up to providing the services their customers demand in a compliant, effective, and stable manner.

At the firm level, there will be changes at banks and investment banks, including the likely need to spin-out proprietary trading to address concerns about conflicts with their retail banking or agency broking business, investment advisory services and in-house asset management. Business lines will also be reassessed in the light of the new prudential and market regimes. This can be expected to change the way banks allocate their own working capital, and how significant amounts of money are placed in the market. We can already see announcements of major structural changes from individual firms, as they rethink their business models. Most recently, for example, a number of major investment banks have announced that they are exiting large parts of the commodities market.

One outcome already being remarked on is a possible shift at the aggregate level in sources of funding from bank financing towards raising cash in the capital markets. In part, this is linked to so-called ‘shadow banking’, of which capital markets are a part, which has been a continued source of discussion among central bankers and regulators in recent years. The Economist’s own special report on the subject described it as ‘huge, fast-growing in certain forms and little understood’ while also noting British banks had ‘slashed their loans to businesses by almost 30% since 2007’.

But there is also going to be change in the capital markets themselves. So, for example:

  • Greater standardisation of financial instruments, to make them more liquid and easier to price, issue and trade.
  • Greater transparency in the market for all parties.
  • New types of trading venues emerging including ‘organised trading facilities’ in the EU and ‘swap execution facilities’ in the US.
  • A more important role for clearing houses, vying to offer clearing services to the market, and for trade repositories, collecting the mass of new data.

Full speech

© FCA - Financial Conduct Authority

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