Britain’s markets watchdog has warned of potential “systemic defaults” among wholesale brokers in the City of London that may be unfit to weather sudden shocks and longer periods of stress.
(Bloomberg) — Britain’s markets watchdog has warned of potential “systemic defaults” among wholesale brokers in the City of London that may be unfit to weather sudden shocks and longer periods of stress.
“Firms continue to underestimate their exposure to intraday liquidity risks arising from their own business as well as from key clients and counterparties,” Simon Walls, director of wholesale sell-side at the Financial Conduct Authority, wrote to company bosses on Wednesday.
This could lead to “disorderly wind downs and raise the risk of contagion and potential systemic defaults,” he added. The FCA saw liquidity risks “crystalize and nearly crystalize” during recent shocks in commodity, energy and government bond markets.
Wholesale brokers help buyers and sellers to match, negotiate and deal in financial securities.
The FCA highlighted brokers that need to post collateral to clearing houses at short notice to cover their positions before getting paid by customers. “Some firms’ liquidity risk management and stress testing was not fit for the current market environment,” according to the regulator.
While the FCA saw some improvements in governance and compliance controls at bigger companies, brokers in general continue to be behind the curve when it comes to stopping “poor conduct and improving culture,” it said.
The watchdog expects chief executives to discuss the letter with their boards and take action by the end of February.
The FCA’s warning comes a day after the Prudential Regulation Authority told Britain’s banks to improve their oversight of counterparty risks, which remain a concern almost two years after the collapse of Archegos Capital Management.
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