By Huw Jones
LONDON (Reuters) – Scrapping get-out clauses for market makers when trading turns rocky could avoid a repeat of the volatile ‘dash-for-cash’ seen at the start of pandemic lockdowns last year, a Bank of England policymaker said on Wednesday.
The BoE and other central banks had to inject liquidity into markets to avoid a freeze as shuttering economies last March to fight COVID-19 triggered extreme bouts of trading volatility.
Regulators across the world are now studying potential reforms to investment funds and how derivatives and other markets work to bolster market resilience and avoid a ‘dash-for-cash’ from happening again.
Jonathan Hall, a member of the BoE’s Financial Policy Committee, said action to avoid another “jump-to-illiquidity” could include forcing market makers to make available buy and sell prices at all times, as the UK Debt management Office already does.
Futures exchanges generally exempt market makers from liquidity provision in “exceptional circumstances” of extreme voltatility, and many bond trading platforms have no market maker obligations unless mandated by local regulators, Hall said.
“Any protection of individual non-bank market makers must be balanced against the systemic costs,” Hall told Cardiff Business School in a speech.
Hall also proposed increasing transparency in how margins or cash posted against derivatives transactions are calculated, and ensure that all derivatives users enhance planning for, and management of, liquidity outflows.
There should also be a principle to always analyse market structure changes in the context of their impacts on liquidity in bad times as well as good, he said.
(Reporting by Huw Jones, editing by Louise Heavens)
