Liquidity

Introduction

The oldest multi-governmental financial institution, the Basel-based Bank for International Settlements, publishes one of the most authoritative overviews of the financial system’s state of play in the form of its annual report. This year’s report was published in late June. Although the banking system remains central to its work, in view of the intertwining of bank and capital markets financing and trading, for some decades now the two components have grown ever more inseparable. Both now figure at length in the report.

“This piece of market regulation, buried among what is primarily meant to be settlement regulation, will have a profound and dramatic impact on liquidity and pricing for the European capital markets,” says an ICMA Impact Study for CSDR Mandatory Buy-ins[1].

It is a clear goal in the post-2008 financial landscape to push towards risk mitigation and transparency. Mandates such as clearing and reporting are being phased in to ensure both pillars are built into financial markets, but how can they be guaranteed? Through the posting of collateral against trading activity.

One of the marked changes across the post-trade landscape post-2008 has been the emphasis on the roles of the middle and back office functions at firms. No longer just cogs in the machine, they have taken a central role in the post-crisis world as regulatory challenges and burdens weigh heavily. Regulators across the globe, in attempting to avert future financial contagion, have shone a light on these previously unheralded departments, making their functionality more important than ever before.

As we looked into last time (http://ds.thomasmurray.com/opinion/shadow-banking-and-regulatory-capital-question), many entities are now providing banking services without themselves being banks. It is a grey area and many of the institutions involved operate within the shadow banking world. We will be looking through the various facets of the shadow banking industry, looking at how it works and the impact that various regulations and directives have upon this $68 trillion global industry.

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