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There will be additional focus on simpler, more standardised products that should help sustain market liquidity during periods of stress, a paper prepared by the Bank of England states. These will be more transparent in design and content, although increased transparency should not be confused with reams of data, the paper suggests.
However, necessary corrections to the new financial products necessitate recognition of additional costs, for example in the screening of information and in the provision and cost of liquidity, the paper says.
Other expectations for future financial market developments outlined in the paper include:
• Products will be more transparent in design and content, to improve the ease of monitoring and hence lower information costs. Increased transparency should not be confused with reams of data. Products are likely to come with a broader range of standard expected performance statistics.
• Rating agencies will supply additional information on the risk characteristics of rated securities and the sensitivity and uncertainty attached to their ratings. But there will also be increased recognition of the limitations and costs of any monitoring function for highly complex products.
• Fourth, end-investors will demand more explicit rules governing acceptable collateral for securitisation and greater due diligence and risk sharing by originators and issuers.
• Investment banks will continue to offer tailored products to match specific risks. But there will be much greater recognition of the illiquidity and hence cost of the bespoke component.
• Banks and other financial institutions will provide more information on exposures as pressures to improve market disclosure and transparency continue. And already regulators are assembling best practice accounting disclosures which should become standard reporting.
• Greater emphasis on standardisation of products may facilitate improvements in market infrastructure. Pressure will continue for more products to be traded on exchanges rather than OTC.