BOE to Publish Review of Regulation Impact on Market Liquidity

  • Rules have reduced normal levels of market-making, BOE says
  • Shrinkage of repo market may have adverse impact on liquidity

The Bank of England said it will publish an assessment of how regulation is running up against the efficient functioning of U.K. bond markets this year.

Measures of liquidity in government and corporate-bond markets are deteriorating, with lower market depth, smaller trade sizes and greater price impact on asset sales, the central bank’s Financial Policy Committee said in a statement Tuesday. Officials are preparing to publish the review of how post-crisis rules could be refined to encourage better market effectiveness.

Anomalies in the market, particularly in derivative instruments, are becoming more persistent as market makers are less willing to provide financing to leveraged investors, the BOE said. The repurchase market -- where banks use debt as collateral to back short-term loans -- is shrinking in size and the price of receiving this service from banks is increasing.

“This increase in the cost incurred by leveraged investors to obtain financing using gilt collateral could reduce activity in financial markets going forward, with potentially adverse implications for market liquidity,” stability officials said in a statement published in London on Tuesday.

The FPC said it considers regulation to be an important part of reform for the banking industry since the financial crisis and that it improves the resilience of markets in times of stress.

“The FPC judges that some market developments motivate careful review and consideration of whether there are any possible refinements to internationally agreed post-crisis regulations that could further promote market effectiveness without compromising the resilience of the core of the financial system,” the statement said.

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