Monday, 3 March 2014

Mark-to-market (the politics of)

Digging around for my paper on the political economy of the repo market, I came across a 1999 position paper from theJoint Group of Banking Associations on Financial Instruments, that at the time opposed the international homogenization of mark-to-market accounting, eerily anticipating the fire sales/liquidity spirals of 2008:

Stock and bond prices exhibit considerable randomness or ‘noise’ unrelated to
identifiable economic fundamentals. This includes exaggerated price swings caused
by disproportionate changes in market sentiment and speculative activity. Recent
examples of market movements provide ample evidence of the extent to which markey prices can move, particularly in thin markets, without economic justification.
Reading this, it remined me of the European Commission's notion of  'virtual/excess' liquidity at the core of its rather radical FTT proposals.  Also of the 2013 FTT critique from the private repo lobby:

          Concepts such as [...] ‘virtual liquidity’ have no little or no foundation in academic research, regulatory analysis or market experience.
The side of the fence clearly matters.