Admittedly, this is a greater problem for those managing significant amounts of money as this is where liquidity problems are most exposed.
Rory Campbell-Lamerton is an investment analyst at Church House Investment Management
Bank of England view
In his opening remarks when launching the most recent Financial Stability Report in July, Bank of England governor Mark Carney warned about the risks of less liquid fixed income markets:
He stated: “Some fixed income markets have become less liquid since the crisis. The risks arising from Greece and the global economy will test market liquidity and could potentially trigger broader adjustments in financial markets. In many markets, average trade sizes and market depth have fallen and prices have become more volatile, with episodes of particularly sharp intraday price changes.
“The risk that concerns the committee is that an adjustment in risk appetite leads to a persistent dislocation in financing markets – dislocations that could be the product of the interaction between regulation, changes to market structure, and the rapid growth of market participants who take continuous market liquidity for granted. This is one reason why the FPC (Financial Policy Committee) is interested in the activities of asset managers.
“The FPC has been working since March to deepen its understanding of the macroprudential risks associated with changes in market liquidity. It will consider a final report in September, and any potential actions thereafter. The Bank is also working through the FSB (Financial Stability Board) to assess these risks globally and will convene an open forum of a broad range of stakeholders on November 11 to discuss developments in market functioning and potential measures to improve market resilience.”
