24 February 2015

Reuters: Shrinking liquidity tops financial market concerns in BoE review

Concern is growing among banks and investment funds that heavier regulation has led to a number of key financial markets becoming too thin to soak up sharp price swings or bouts of volatility, laying the groundwork for another financial crisis.

That's the common thread running through the responses of 66 market participants to a consultation led by the Bank of England on what needs to be done to reinforce confidence in the fairness and effectiveness of fixed income, currency and commodities (FICC) markets.

"There are now growing concerns regarding the availability of necessary liquidity in core FICC markets, particularly in periods of market stress, and signs of increasing fragility," Morgan Stanley said.

The responses from across the industry published February 24 will feed into final recommendations from the BoE-led review in June, due after May's general election.

Regulators have moved since the 2007-08 financial crisis to increase banks' capital and reduce the scale of bets they can make on market movements, in an effort to rebuild trust in the banking system.

But banks have argued for some time that shift has hampered their profitability and made it harder for them to fulfill vital financial functions such as market-making, particularly in bond markets.

And responses to the Fair and Effective Markets Review consultation showed that many other participants now agree that the resulting shrinking liquidity is harming the structure of the financial system.

Some market participants and market-makers have already withdrawn from certain FICC markets, while the barriers to entry for new participants have increased.

The review may recommend new rules to raise standards of behaviour and make markets harder to rig. It will seek to plug any gaps left by a raft of new rules already in the pipeline but won't impose uniform remedies, a BoE official said on Tuesday.

Full article on Reuters

Fair and Effective Markets Review consultation responses

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