Wednesday, August 12, 2015

PwC released a detailed report analyzing current trends in financial market liquidity, commissioned jointly by the IIF and GFMA.

This study combines market data analysis across a variety of asset classes with detailed explanations of the economics of market-making, and how various new regulatory changes are transmitted to market outcomes.

The report notes that the full effects on liquidity for some end-users have been masked by extraordinary monetary policy. For instance, primary market conditions are highly favorable for corporate issuance, and while liquidity in secondary markets is strained, this has yet to transmit across into primary markets. In this sense, we believe that the report’s findings could be considered akin to an early warning signal.

In analyzing the impact of new regulations on financial markets, the report acknowledges that such regulatory initiatives are valid responses to the financial crisis and in many cases have an ‘intended’ consequence when viewed in isolation, but identifies that the cumulative impact of multiple initiatives may be causing strain.

The IIF remains supportive of regulatory reforms to strengthen the system undertaken since the crisis, however, this study underscores the need for regulators to consider such cumulative impacts as they review the current regulatory rule set and pursue additional regulatory initiatives. 

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