The Global Financial Markets Association (GFMA) and the Institute for International Finance (IIF) today released a comprehensive new report from PwC on the state of global market liquidity, produced on behalf of both Associations.

“The findings from our research suggest early warning signals that regulation and other market factors are contributing to a reduction in certain aspects of secondary market liquidity that is likely to be exacerbated by the unwinding of quantitative easing or another stressed market situation,” said the report’s author, Nick Forrest, Director in PwC UK’s Economics and Policy Practice. “Our analysis suggests it is important for policymakers to consider the aggregate impact of current regulation and weigh the incremental financial stability benefits of new rules against the incremental costs of diminishing market liquidity to ensure regulation is not counterproductive.”

The Associations commissioned PwC to undertake a broad review of market liquidity data given the importance of liquidity to an efficient financial system and increasing concerns from market participants and policymakers regarding the impact of financial regulation on liquidity. PwC’s analysis focuses on available data regarding the tightness, immediacy, breadth and depth of liquidity and concludes that there are grounds for policymakers to review the calibration of reforms to date and the ongoing regulatory agenda, in order to properly understand the effects of regulatory initiatives by asset class, and to consider whether upcoming regulatory initiatives could likely exacerbate the trends in liquidity with no incremental benefits to safety and soundness.

“Robust market liquidity is essential to efficient capital markets that can drive capital formation, investor opportunity and economic growth. PwC’s findings indicate the need for policymakers to engage in further analysis of the cumulative impact of the rules implemented before moving forward with any new rules that could impede the markets from fulfilling this role,” said GFMA CEO Kenneth E. Bentsen, Jr. “A tremendous amount of regulation has already been implemented over the past five years in response to the financial crisis. While the intent to improve financial stability is entirely appropriate, regulators must also consider the impact to market liquidity.”

“PwC’s report takes an important snapshot of recent market conditions and identifies key factors that are contributing to reduced liquidity in some financial markets,” said Tim Adams, President and CEO of the IIF. “This is the beginning of an intensive effort to better understand and evaluate this complex and rapidly evolving issue and to periodically present our findings to policymakers worldwide. As the study illustrates, the cumulative impact of all recent financial reforms is not yet known. Regulators should take this opportunity to assess the total impact of recent reforms on market liquidity and consider it carefully before moving forward on any new rules.”