On October 11, 2016, Commodity Futures Trading Commission (CFTC)
Commissioner Christopher Giancarlo made an important request to other financial regulators after
the October 7, 2016 flash crash in the British Pound. Commission
Giancarlo's request follows his prescient warnings in 2015 that
uncoordinated regulations were draining liquidity from U.S.
financial markets, as well as his recent podcast reminding regulators and market
participants that "21st century markets need
21st century regulation." Speaking about the
October 7th flash crash in Sterling, CFTC Commissioner
There have been at least twelve major flash crashes since the passage
of the Dodd-Frank Act. The growing incidence of these events shakes
confidence in world financial markets.
We can no longer continue to avoid
the question of whether the amount of capital that bank regulators
have caused financial institutions to take out of trading markets
is at all calibrated to the amount of capital needed to be kept in
global markets to support the health and durability of the global
Today, I repeat my call for a
thorough and unbiased analysis by U.S. financial regulators and
their overseas counterparts of the systemic risk of unprecedented
capital constraining regulations on global financial and
Flash Crashes and Phantom Liquidity
Reduced liquidity in cash and derivative fixed income markets is
due in part to macroeconomic forces beyond increased regulatory
scrutiny. But Commissioner Giancarlo is correct. Disparate
regulations including Basel III capital requirements, Title VII of
the Dodd-Frank Act rules and the Volcker Rule have combined to sap
liquidity from even the deepest and most stable markets. The
October 15, 2014 U.S. Treasury market flash crash was perhaps the
first big warning for market participants. Unfortunately, the
October 7th late night Sterling sell-off will not likely
be the last fixed income flash crash. With banks stepping back from
their traditional role as market makers, non-bank liquidity
providers shouldn't be burdened with regulations that limit
their ability to hold inventory or make bids (particularly during
times of market stress). U.S. financial regulators can encourage
new market participants to step in and act as liquidity providers
by eliminating certain elements of proposed
Regulation Automated Trading, continuing to refine Swap Execution Facility
requirements and better coordinating the cross-border margin rules with non-U.S.
regulators. To paraphrase CFTC Commissioner Giancarlo,
"21st century liquidity providers need
21st century regulation."
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