The Bank of England (BoE) should increase its focus on how to create more liquid markets to improve their resilience, according to interdealer broker ICAP.
In a response to the BoE’s Fair and Effective Markets Review, ICAP said current and proposed regulation, along with market pressures, risk creating highly illiquid markets that could threaten stability and confidence in the financial system.
“Current and proposed regulatory and market pressures, through higher capital, collateral and transparency requirements, constrain firms from advancing credit and risk driving financial institutions out of market segments: particularly given the continual challenges in major economies,” it wrote.
ICAP argues that markets that have inadequate levels of liquidity and credit have a much greater risk of volatility, mispricing and a higher potential for abusive behavior. It calls on the BoE to support liquidity providers in broad and diverse markets in order to achieve its goals.
It added that confidence in financial markets is best achieved by agreeing an approach to addressing their inherent complexities, but not by standardisation of how markets operate.
ICAP also called on regulators to provide clearer guidance to firms on what they consider to be appropriate and inappropriate market practices and to support decision making on valuations, automation and surveillance. Without these, there is a “risk of confusion and hesitation amongst where intentioned participants, to their potential detriment.”
Duncan Wales, group general counsel at ICAP, added: “The Fair and Effective Markets Review provides an opportunity to be forward-looking and restore confidence in the essential functioning of the financial system and economy.
“We believe the core objective of this review should be to assist the industry and regulators to proactively intercept malpractice and structural weaknesses before they become full-blown crises. The proposals from the Bank of England should be aimed at improving confidence in the UK as a place to do business, creating incentives for market users and investors while promoting innovation.”