Bank of England policymaker questions market maker get-out clauses
Reuters
Published May 19, 2021 04:38AM ET
By Huw Jones
LONDON (Reuters) - Scrapping get-out clauses for market makers when trading turns rocky could avoid a repeat of the volatile 'dash-for-cash' seen at the start of pandemic lockdowns last year, a Bank of England policymaker said on Wednesday.
The BoE and other central banks had to inject liquidity into markets to avoid a freeze as shuttering economies last March to fight COVID-19 triggered extreme bouts of trading volatility.
Regulators across the world are now studying potential reforms to investment funds and how derivatives and other markets work to bolster market resilience and avoid a 'dash-for-cash' from happening again.
Jonathan Hall, a member of the BoE's Financial Policy Committee, said action to avoid another "jump-to-illiquidity" could include forcing market makers to make available buy and sell prices at all times, as the UK Debt management Office already does.
Futures exchanges generally exempt market makers from liquidity provision in "exceptional circumstances" of extreme voltatility, and many bond trading platforms have no market maker obligations unless mandated by local regulators, Hall said.
"Any protection of individual non-bank market makers must be balanced against the systemic costs," Hall told Cardiff Business School in a speech.
Hall also proposed increasing transparency in how margins or cash posted against derivatives transactions are calculated, and ensure that all derivatives users enhance planning for, and management of, liquidity outflows.
There should also be a principle to always analyse market structure changes in the context of their impacts on liquidity in bad times as well as good, he said.
Get The News You Want
Written By: Reuters
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.