samchain/econo-pairs-v1 huggingface dataset:
Keeping up with fast markets Speech given by Chris Salmon, Executive Director, Markets, Bank of England  13th Annual Central Bank Conference on the Microstructure of Financial Markets, London 6 October 2017  I am grateful to Tom Horn, Geir-Are Karvik, Joseph Noss, William Rawstorne, Jack Worlidge, Jonathan Rand and to other colleagues for their comments and contributions. 1  All speeches are available online at www.bankofengland.co.uk/speeches  Good morning and welcome to the second day of our conference. Yesterday we heard from Richard Payne’s session on the subject of algorithmic trading – a key development in market structure, enabled by the greater prevalence of electronic trading. This morning I want to step back a little further and look at the broader implications of the moves toward more electronic and automated trading. One phenomenon this has given rise to – and perhaps the element which has most captured the public imagination – is the series of ‘flash’ events which have occurred over recent years (Chart 1). The 2010 flash crash in US equities was the first such episode to generate headlines outside the industry. Four years later, in 2014, we saw something similar in the US treasury market, the most liquid bond market in the world. Closer to home, shortly after midnight in London on 7 October last year, the bid for sterling momentarily evaporated, with the currency falling nearly 10% against the US dollar before quickly reversing (Chart 2).

The changing distribution of risks for individual firms  Moving on to my second example, even in the absence of systemic spill-overs from flash episodes, fast markets alter the pattern of risks that individual market participants are exposed to. And there good grounds for concluding that more needs to be done to ensure market participants take account of this consistently. 14  See BIS (2017), ‘The sterling ‘flash event’ of 7 October 2016’, January. See Joint Staff Report (2015), ‘The US Treasury Market on October 15, 2014’. 16 In this spirit, the FPC concluded following the sterling flash event that “such disruptions underscore the concern that liquidity in some markets may have become more fragile in recent years”. See Record of the Financial Policy Committee Meetings held on 23 and 29 November 2016. 15  6  All speeches are available online at www.bankofengland.co.uk/speeches  6  Use of algorithms does not change the fundamental risks associated with trading in financial markets (e.g. market, counterparty and operational risks). But use of high-frequency trading algorithms does change their relative intensity and can materially increase the potential to build up significant intraday positions. This latter point is most obviously true for those bank and non-bank intermediaries that specialise in highfrequency trading. And though these firms should be expert in managing such risks, history shows this is not a given.
The remaining 12, like me, are chosen by ninemember, nonpolitical boards of directors of citizens in their districts and charged with conducting the business of the Fed in the field based on our business acumen and with developing policy insights based upon what we see, hear and measure on Main Street. Together, the 17 of us formulate policy with the best judgment we can collectively muster, free from political pressures or the passions of the moment, on what is in the best long-term interest of the country’s economy. We each gin up forecasts for the economy. All 17 FOMC participants’ expectations for the economy through 2013 and beyond were released to the public yesterday and widely reported in the press today.5 To develop those forecasts, we employ sophisticated econometric models, study the entrails of numerous comprehensive surveys conducted all across the nation – like the Dallas Fed’s Texas Manufacturing Outlook Survey and the Texas Retail Outlook Survey and their counterparts in other Federal Reserve districts – and draw upon input from our boards of directors, numerous advisory boards and contacts with businesses and stakeholders nationwide and worldwide. These forecasts are helpful guideposts, but they must be kept in context. Kenneth Arrow, one of the most notable Nobel Laureates in economics, has his own perspective on forecasting. During World War II, he served as a weather officer in the U.S. Army Air Corps and worked with a team charged with the particularly difficult task of producing month-ahead weather forecasts.

That certainly implies a wide spectrum of actions: from generating online the account statement to transfers and payments via electronic platforms from various institutions, which are different from banks, digital money or virtual currency. Physical and digital worlds are intertwining rapidly. What do we imply with financial innovation, while speaking about financial technology ( Fin Tech)? An expert of this field says than Fin Tech should not indispensably be a rather complicated or sophisticated technical concept. Fin Tech supports business to be more effective and the systems to function better and faster, or simply to make life easier to individuals/businesses through the use of efficient financial services. Authorities have a decisive role in being committed to and supporting innovation. Advanced countries, such as Great Britain, are a good example of this approach. In the United Kingdom, the volume of transactions has grown by 74% since 2008, compared to 27% growth for the whole world or 13% for Silicon Valley. The British success is driven by the large support of government strategies and programs, from the regime of the points of sales, initiative to encourage investments and the establishment of the regulatory framework that provide grounds for the success of new initiatives, the possibility to access credit data for small-size enterprises, in the payment system and equal participation in the free competition. What can a Central Bank do?
Then we will move on to the impact of the recent global financial crisis on the rising issue of financial education and financial awareness. Taking into account the importance of benefiting from other countries’ experiences while formulating national financial education strategies and programs, in the second session we will focus on financial education practices around the world. I believe that this session will yield very useful inferences. In the third session, we will listen to experiences of those countries that have made significant progress in designing their national financial education strategies and we will learn their methods, challenges and suggestions for solutions as well as the outcomes they obtained. On the second day of the Conference, we will elaborate the current efforts on financial education in Turkey and the roles and responsibilities of all relevant stakeholders. At this point, the cooperation between institutions will play an instrumental role in designing national strategies. The implementation of education programs is as important as designing financial education strategies and this issue will be thoroughly discussed in the sixth and last session of the Conference. As the Central Bank of Turkey, we strongly believe that the significance of financial education is far beyond its conceptual meaning and we attach great importance to collaborating with national and international institutions in this area. We believe that this Conference with the valuable contribution of the Capital Markets Board will be a milestone. I wish the Conference every success and thank everyone who has made a contribution. 2  BIS central bankers’ speeches

Against this background, it is timely that SEACEN Centre has initiated this course to explore the nature of financial intermediation, the role of financial markets in the allocation of resources and the need for appropriate regulatory framework. As regulators, we need to understand the concepts and the basics of the working, the pricing and trading strategies of the derivatives markets and instruments, how financial entities use them in risk management, as well as their potential impact on financial system stability. But more importantly, in these two weeks, we will benefit from the presence of a number of distinguished speakers that have kindly given up their time to be with us. I hope we will use this opportunity fully. On this note, I would like to thank Mr. Sunil Sharma, Chief, Asian Division, IMF Institute, for his efforts to coordinate this course with the SEACEN Centre and the Bank of Thailand. I trust that this course will be most fruitful and rewarding for all the participants, but above all that the interaction among yourselves will provide an opportunity for you to learn from one another, and strengthen the bonds of friendship that bind the works of our institutions for many years to come.
After completion of the gold sales and the distribution of the proceeds from the sales to the Swiss government and the 26 cantons, the SNB’s balance sheet will consist of approximately CHF 90bn. With the remaining 1290 tonnes of gold reserves, the SNB retains roughly 20 percent of its assets in gold. By international comparison, the SNB continues to hold a very significant stock of gold. During the remainder of my talk, I would like to address what strike me as the most relevant issues that came up in connection with these gold sales. I will begin by outlining the historical context of the SNB’s Governing Board’s decision to declare 50% of its then gold reserves as no longer necessary for monetary purposes. As you will see, a number of constitutional and legislative changes were necessary for that policy decision to result in actual gold sales. I will then outline how the SNB designed, revised and implemented its selling strategy. Finally, I will attempt to draw some tentative lessons from these gold sales, some of which might be of interest to those central banks or international institutions that are considering gold sales or have recently begun to sell gold. II. Historical context  In 1999, the SNB held 2590 tonnes of gold on its balance sheet. At that time, the SNB’s gold stock represented 30% of U.S. gold reserves. In relative terms, Switzerland’s position was extreme among the G10 countries.

Philipp M Hildebrand: SNB gold sales - lessons and experiences Speech by Dr Philipp M Hildebrand, Member of the Governing Board of the Swiss National Bank, at the Institute for International Economics, Washington, DC, 5 May 2005. * I. *  *  Introduction  I am pleased to be in Washington today and would like to thank Fred Bergsten and his colleagues at the Institute for International Economics for providing me with this opportunity to talk about the recently completed gold sales of the Swiss National Bank (SNB). In June 1999, the Governing Board of the SNB decided that half of its then gold reserves of 2590 tonnes were no longer required for monetary purposes and that it would inform the market and the public accordingly. This decision contributed to the process that eventually led to the first central bank agreement on gold sales. This so called Washington Agreement provided the framework for the subsequent gold sales of the Swiss National Bank, the ECB and thirteen European national central banks. Under this agreement, the SNB’s realized sales of 1170 tonnes which represented the bulk of the total sales of 2000 tonnes for all participating central banks. The SNB completed its gold selling program on March 30, 2005 after selling a residual 130 tonnes under the second central bank agreement on gold sales.
This served not only to foster consumer confidence in payment cards but also boosted credit card spending by foreign tourists which increased from RM4.3 billion in 2006 to RM7.9 billion  BIS central bankers’ speeches  3  in 2013, an increase of 83% over 7 years. In 2013, fraud losses had remained low at less than 0.03% of the total value of debit and credit card transactions. Due to the liability shift in the rules of the international payment card network operators, about 89% of these losses are borne by foreign financial institutions who have yet to implement the higher security requirements. Consequently, our fraud losses amounted to only 0.01% of the total payment card transaction value, which is quite low by international standards. One lesson learnt was that if we invest intelligently in infrastructure, we would certainly reap the benefits faster than expected. Nevertheless, there have been recent reports on concerns over emerging fraud threats in online banking and online payment card transactions. In this regard, I would like to stress that individuals do not and should not bear any loss arising from any unauthorised transaction not caused by them. Bank Negara Malaysia will not tolerate any cases where financial institutions have acted unfairly by passing the liability of fraud losses to their customers. Bank Negara Malaysia holds the board of directors of financial institutions responsible to ensure that effective safeguards are in place to counter both present and emerging fraud threats.

BIS Review 66/2004  7  Meanwhile, even with a clear intention to do so, the practice of lending, and the pricing of lending, in accordance with state policy and not the credit worthiness of the borrower takes time to get rid of. Although it does not take long for the credit officer to learn to look at the balance sheet and the profit and loss account of the borrower, the security of the job requires an unspoken recognition of the authority of those in a position of power in the government bureaucracy. A further complication is the fact that commercial bankers are part of the government bureaucracy. In such a system, it is difficult for the bureaucratic position of the individual to be aligned with the commercial interest of the bank, which is to make profit. There is an interesting description of the stance of such an individual: where you stand (on an issue) depends on where you sit (in the bureaucracy). Consequently, it will take some time before the process of credit allocation becomes entirely market-based and the banks subject to the market disciplines that we are familiar with. One implication of this is that the high NPL and low capital adequacy ratios will continue to be a feature, with ebbs and flows, as capital injections get rid of the stock of NPL while the flow of NPL continues, but hopefully at a reduced pace as corporate governance improves. Professionalism cannot be acquired overnight.
For this reason, Madam President, I would like to suggest dealing with this topic in greater depth in a session of the Commission especially designed for this purpose, which would allow us to deepen the background information compiled for this Report’s box and identify priorities for future follow-up. Nature and relevance of uncertainty in the current scenario The second topic I would like to address is that of uncertainty. As you will have noticed, this term is mentioned several times in this Report when characterizing the economy’s current situation and its outlook. It is appropriate to go deeper into the meaning of this concept because it is too often used or interpreted in different ways, some of them as a synonym for risk and/or threat to the economy. According to its formal definition, uncertainty refers to the lack of certainty, that is, the degree of randomness in variables of interest such as, for example, economic variables that affect welfare. Other definitions point to a diversity of plausible states, to which it is not possible to assign a probability of occurrence. These definitions mark a difference with the concept of risk, because the latter refers to the real possibility of occurrence of certain adverse events. Thus, uncertainty is a broader concept that is not necessarily related to adverse events or even to concrete possibilities.

In fact, the cost of maritime freight has tripled, and the prices of other inputs and commodities, such as construction materials, food and agricultural produce, have also risen considerably (Figure 11). All of this has been reflected in higher producer prices and increased short-term inflation expectations in several economies. Although global markets expect the effect on inflation to be mostly temporary, concern has increased in those economies where demand-boosting policies have been most significant. In the United States, inflation surprised to the upside in March and April, while a large fiscal stimulus package is being implemented and monetary policy remains highly expansionary. Measured inflation expectations have risen, while financial markets have experienced bouts of inflation-related volatility. In Chile, inflation has evolved as expected, as the CPI’s annual change rose to 3.6 percent in May. Expectations are in line with the two-year policy target. The annual variation of the CPI has continued to be mainly determined by the behavior of goods and energy prices. The former continues to be pressured by tight inventories in a context of high demand. The latter reflects the rise in oil prices and the low comparison base. Core CPI today stands at 3.4 percent (Figure 12). III. Projections  Expected growth for this year substantially increases in the central scenario, to a range between 8.5 and 9.5 percent.
Paul Tucker: Shadow banking, financing markets and financial stability Remarks by Mr Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, at a Bernie Gerald Cantor (BGC) Partners Seminar, London, 21 January 2010. *  *  *  Many thanks for input to Andrew Bailey, Michael Cross, Colin Miles, Victoria Saporta, and for earlier conversations with David Rule (now FSA) and Bill Winters. For background work to Michael Grady and for secretarial support to Sandra Bannister and Cheryl Feeney. This should be the crucial year in establishing a framework for a more resilient global financial system. Much of the authorities’ work is about how to do better in well-established areas of policy: bank capital requirements, liquidity requirements, supervision, and so on. But new areas are being debated, or revisited, too. Those debates are more profound. They include whether we can develop macroprudential instruments and regimes for “taking away the punchbowl” from future financial-system parties before they get out of control. Whether we can develop regimes for the resolution of banks and other key financial firms that can reinject market discipline into the financial system, while at the same time ensuring continuity of essential financial services to the economy in the event of severe distress at large, complex, cross-border firms. And whether the structure of the financial system needs to be constrained by the authorities. This evening I am going to focus on one part of the “structure” debate: shadow banking.

This effectively financed the inventory of dealers and other leveraged investors. Demand was strong. The financing tail came to wag the securities-lending dog. I doubt whether all asset managers understood the instruments they would have been holding outright in the event of a counterparty default. But that is only the beginning. Some asset managers used the cash generated by securities lending to buy risky assets outright. AIG’s escapade in and massive losses from the CDS and CDO business is well known. Less remarked upon, although public, 7 is that the insurance parts of the group – not the derivatives part – lost enormous amounts of money from securities lending, as they ended up reinvesting vast amounts of cash in securities. These investments had maturities of years not months, notwithstanding that a securities lending contract typically gives the borrower as well as the lender (ie the underlying owner of the securities) a right to terminate the transaction on demand. Again, I suspect that many asset managers did not understand their exposures. They had leveraged up, and exposed themselves to liquidity risk. Securities lenders like AIG were effectively assuming robust liquidity in the secondary market for their reinvestment securities. They were wrong. As the value of those assets fell, “securities lending” counterparties called their repos. In effect, to add to the problem of accumulating investment losses, AIG suffered a repo run – just like a bank run, in fact.
According to information from the Bank for International Settlements, the volume of new issues in euro (calculated as a gross figure) almost doubled in the first half of 1999 compared with same period last year. By contrast, the increase in new issues in US dollars was around 10% weaker. New issues in the Japanese yen and the Swiss franc either stagnated or even declined somewhat. With regard to the role of the exchange rates between the euro and other important currencies outside of the EU, in particular the US dollar, the Eurosystem made an unambiguous choice when shaping its  5  BIS Review 99/1999  monetary policy strategy. This strategy clearly excludes any explicit or implicit targets or target zones for the euro exchange rate. The pursuit of an exchange rate target could easily jeopardise the preservation of the price stability objective and therefore hamper real economic developments. It should also be noted that exchange rate fluctuations are often caused by structural or fiscal policy as well as divergent economic developments. Monetary policy would be significantly challenged and its credibility put at risk, if such exchange rate fluctuations had to be contained by monetary policy. The absence of an exchange rate target does not mean that the ECB views the exchange rate of the euro as irrelevant or does not take it into account. On the contrary, the exchange rate is monitored and analysed as a potentially important monetary policy indicator.

The Governing Council consists of the Executive Board of the ECB and the governors of the central banks in the euro area. Monetary policy decisions are implemented by the Eurosystem, which comprises the ECB and the national central banks of the 11 participating EU Member States. The national central banks are, above all, entrusted with the decentralised implementation of the single monetary policy and the relevant activities in their countries. First, I should like to say that the launch and the first few months of the common currency have, in our view, gone well. The initial experiences with the euro and the single monetary policy have proved to be both positive and encouraging. We have currently achieved price stability and the prospects look good for this to remain the case in the years to come. The Governing Council of the ECB has become a truly supranational body. The members of the Governing Council clearly see themselves as committed to this joint cause. They take the whole euro area into consideration when discussing and taking decisions on monetary policy. The efforts made prior to and at the time of the changeover weekend at the beginning of this year are already part of history. Since the beginning of this year the euro has been quoted on the international financial markets and used for cashless payments.