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The madness of taking liquidity out of the market

As the world struggles for economic growth there is a weird onus on restructuring the markets and wrapping massive amounts of legislation and regulation around managing risks. It’s a knee jerk reaction from politicians desperate to show voters that they are doing something to stop any reoccurrence of the financial disasters first seen in 2007. It’s understandable but totally the wrong thing to do at the wrong time and is likely to stifle any chance of real growth for years to come.

One of the European initiatives is to harmonise the financial markets and create a stable and appealing investing zone to attract masses of foreign investments. Key to the success of harmonising the markets is to introduce a standard clearing and settlement process at a reduced cost within the Eurozone. The T2S project has been a long time in gestation but is now beginning to move towards birth. It is hoped the T2S system will overlay the European clearing and settlement market bringing new levels of standardisation and eventual cost cutting and risk reduction for cross-border settlements.

With Clearing Houses expected to clear OTC products, it is imperative that better management and control of collateral, and initial and variation margins is introduced. Therefore there is a huge need to ensure that the clearing and settlement infra-structure and processes are far more efficient than today.

The risks of introducing so many fundamental changes to the European Clearing and Settlement market are very significant. Good planning for these important changes is vitally important for all financial services firms whether they are Brokers, Investment Managers or Custodians. In fact any firm that is involved in clearing and settling transactions will be affected and must prepare.

Get this wrong and financial services firms, especially banks, will have to retain masses of capital and financial products as assets to pledge against margin calls. Liquidity in the derivatives markets could dry up and directly lead to liquidity shortages in the secondary equity markets. For example: this would affect the ability of SMEs and Insurance companies to have enough liquid assets to carry out their functions.

Planning is therefore the key if the financial markets are going to be able to succeed and achieve the political objectives. Join the debate at the next Post Trade Forum on the 26th June where the future of European Capital Markets will be discussed.     




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Gary Wright

Gary Wright


BISS Research

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19 Sep 2007



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Post-Trade Forum

The Post Trade Forum's aim is to propagate debate and discussion between senior practitioners in Post Trade Operations in the global securities market; to bring about increased awareness and knowledge across both buy-side and sell-side financial institutions in financial products and be a focal point for firms and practitioners to air views.

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