And with internationally active banks managing multi-currency balance sheets, a local approach to liquidity regulation is becoming less relevant. It is for this reason that the Basel Committee for Banking Supervision decided to convene a Liquidity Working Group to take stock of prudential approaches internationally and to explore whether there is a case for greater consistency. The critical role of infrastructure The financial market infrastructure – exchanges and the systems used to clear and settle market trades or cash obligations – also plays a critical role here. Market participants rely on such infrastructure to implement their desired portfolio allocation; to execute risk management strategies; to raise liquidity, both in normal course and in times of stress; and to manage contingent exposures and cash-flows. It is therefore important for financial stability that these systems function efficiently and continuously, and do not introduce unnecessary costs, risks or frictions to trading and post-trade processes. Frequent interruptions to pre- or post-trade processing, or excessive costs in accessing core components of the market infrastructure, can impose significant welfare costs. Under such circumstances, agents may be forced to deviate from their desired portfolio allocations and risk exposures, or indeed may be prevented from meeting their obligations as they fall due. With markets for credit risk transfer (CRT) growing rapidly, there has been an expansion in the range of transactions for which robust, resilient and well-designed infrastructure is essential.

Two aspects of legal certainty are particularly crucial: Contractual certainty One key element of a stable legal framework is contractual certainty. Systems of contract law that show respect for formal agreements help to drive down commercial risk and therefore to promote the efficient allocation of capital. And uncertainty as to the enforceability of contracts is likely to be particularly damaging to financial markets. Against this background, contracts are becoming longer and more complex as financial innovation continues apace: the documentation for a structured finance product can often run into several hundred pages, thus raising the important issue of “documentation” risk. Legal and regulatory stability Another key element is legal and regulatory stability. This is very important to the financial markets, where the ability to form complex plans with a degree of confidence as to the stability over time of external influences (such as legal rules) impacts directly on risk, price and, ultimately, the efficient allocation of capital. A stable planning environment is conducive to investment and, therefore, market growth. Examples of harmful consequences of ambiguities in legal/regulatory frameworks include uncertainty as to the extent and scope of regulatory obligations or sanctions, and uncertainty as to how old laws will apply to dynamic and fast-changing market practices. The Financial Markets Law Committee (FMLC) In recognition of this, a number of countries have established groups of experts to promote greater legal certainty in financial markets. In the UK, the Financial Markets Law Committee was established in 2002.