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June 20, 2012 9:27 am
Traders should be prepared for government interventions ranging from bans on short selling to capital controls because “market liquidity is no longer limitless and no longer free”, a UK financial stability regulator told hedge fund managers in Monaco on Wednesday.
Robert Jenkins, an external member of the Bank of England’s Financial Stability Committee, told the Global Alternative Investment Management conference that the Greek debt crisis has so undermined confidence in the eurozone that depositors are fleeing weak eurozone countries.
Some banks in turn are protecting themselves from possible capital controls and currency changes in those countries by cutting lending to match their shrinking deposit base in those same territories, he said.
“Containment is not enough . . . The challenge is no less than to restore faith in the entire euro construct. Confidence must be such as to completely banish cross-border risk from financial planning.
“Until and unless this is accomplished, the eurozone credit system has the potential unravel, the free flow of capital will be impaired and the economic recovery constrained,” said Mr Jenkins, a former asset manager who now sits on the UK’s macroprudential regulator.
He also warned that trading strategies which rely on deep and instantly liquid markets, including many algorithmic programs and long/short funds that presume shorting is available could be under threat.
“Confronted with sudden surges in cross-border flows, elected governments will attempt to intervene in the interests of stability generally and to protect their taxpayers specifically. They may not succeed, but it is their right and duty to try. Needless to say, your well timed trading strategies will not be allowed to get in the way,” he said.
“I recommend that you send your best and your brightest to the library to research state intervention in the postwar period. It could come in handy,” he added,
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