Chris Salmon: Market functioning

Speech by Mr Chris Salmon, Executive Director for Markets of the Bank of England, at the OMFIF City Lecture, London, 24 January 2017.

Introduction

It is a pleasure to be here this evening. The economic and political events of the past twelve months raise many questions. From my vantage point as the head of the Bank of England's Markets Directorate, they reemphasise the need for central banks to understand the structure and functioning of core financial markets. That matters both for our role as guardians of financial stability, and to ensure the effectiveness of our own operations to implement monetary policy. Let me illustrate this with reference to developments in two very different markets.

i) The first - the sterling FX market - a large, global, highly liquid, and almost continuously traded, market, with a constantly evolving structure. Here, the challenge is to understand how those developments affect the functioning of the market. My focus will be on the lessons about market functioning from two particular episodes last year: the period immediately following the EU referendum and its 'flash crash' a few months later.

ii) The second market - the sterling corporate bond market - is small, local, and thinly traded, with heterogeneous underlying assets. Here I will explain how our analysis of market structure shaped the design of the Bank's corporate bond purchase scheme, and how the scheme may have affected the functioning of the market.

In both cases our understanding of these markets, informed by market intelligence, analysis and our own experience in previous operations, has been both tested and improved as the Bank has responded to events.