Market watchdogs fight back against central banks
By Huw Jones
LONDON (Reuters) - An uneasy truce between market watchdogs and central banks, struck during the financial crisis, is showing signs of strain as they look for ways to tackle potentially extreme volatility in bond markets when interest rates start to rise.
The watchdogs are worried central banks will try to impose bank-style rules such as capital requirements on market players like asset managers and specialist funds.
While that might improve the market players' ability to withstand big swings in prices, it could lead to higher trading costs and so reduce liquidity -- possibly even increasing volatility, the market supervisors fear.
Time is running out to come up with an in-depth plan, as economists believe the United States will start raising borrowing costs in the autumn. Nervousness over an increase in rates from their prolonged, very low levels has already triggered wild bond market swings.
"We are at an inflection point," said Ashley Alder, chief executive of Hong Kong's market supervisor, the Securities and Futures Commission.
"There is a new conversation between prudential regulators, who are rightly focused on fire-proofing banks, and market regulators, who deal with different concerns," Alder said.
As the 2007-09 financial crisis began unfolding, regulation focused on stability by forcing banks to hold more capital.
Central bankers were firmly in the driving seat at the Financial Stability Board (FSB), the regulatory task force coordinating rules for the Group of 20 economies (G20) and currently chaired by Bank of England Governor Mark Carney. Continued...