BoE delves deeper into asset managers, 'fragile' market liquidity
By Huw Jones
LONDON (Reuters) - The Bank of England is taking a deeper look at whether some investment strategies and computerised trading are increasing volatility in markets and putting further strain on already fragile liquidity.
The Bank's Financial Policy Committee (FPC), which monitors the financial system for potentially destabilising risks, said "disorderly" swings in markets, such as those on the New York Stock Exchange in August, have so far been short-lived and without systemic consequences.
"However, there is evidence that disorderly conditions in one market can spill over to others," the FPC said in a statement on Friday following its quarterly meeting.
The committee includes top officials from Britain's financial regulators who have powers to intervene in Britain's financial markets.
The meeting discussed provisional findings of a BoE study into why liquidity, or the ability of investors to buy and sell assets easily, has become fragile and if it harms funding for the economy.
The FPC said it wants more information and noted that the use of computers in trading was a common feature in recent episodes of volatility.
There was evidence that turnover in corporate bond markets has fallen, and the committee asked for an updated assessment of changes in dealers' ability to provide a market in debt.
Banks say tougher capital charges introduced since the financial crisis on holding inventory of bonds on their books means that market-making is less economic.
The BoE will also study risks from open-ended funds offering short-notice redemptions.
Given the fragile liquidity, policymakers worry that in times of market turbulence, funds could not honour pledges to give investors their money back.
The BoE has surveyed 17 asset management firms covering 143 funds, and conducted follow-up interviews with eight firms.
Funds operating under European Union rules known as UCITS ensure that remaining investors are not disadvantaged when redemptions occur, the FPC said.
It has asked for more work on the potential impact of so-called correlated investment by funds, and on the measures the funds could deploy under stress.
This refers to assets from different markets moving in lockstep, sometimes accentuating swings in prices as funds focus on broad factors like sentiment rather than the attraction of individual stocks.
The FPC will report its conclusions in December.
The U.S. Securities and Exchange Commission this week proposed a new rule requiring mutual funds and exchange-traded funds to devise plans to ensure they can meet redemption demand during market stress.
(Editing by Susan Fenton)
