FCA boss sounds alarm on financial warfare and debt levels
Rising sovereign debt and the growing risk of an attack on Britain’s financial infrastructure are the two biggest threats to UK markets, the boss of the Financial Conduct Authority (FCA) has warned, as he issued a clarion call for more data on the trading of government bonds.
Nikhil Rathi told peers that the danger to market integrity posed by new threats in the geopolitical arena and the accelerating pace and influence of opaque, foreign bondholders will occupy “a lot of [his] time” in the years ahead.
Asked by Lord Vaux what the main issues the watchdog was keeping an eye on, Rathi said: “The biggest one I would call your attention to is the scale of market risk out there in the context of complicated geopolitical circumstances, potential disruptions of the global trading system, and the way in which security and financial issues can start to intersect.”
The FCA chief executive pointed peers on the Financial Services Regulation Committee to the recent Iran-Israel conflict, when the Israel Defense Forces targeted trading systems and ATMs in Tehran with an aggressive cyberattack.
Russia has also opened up a financial front in its attritional war on Ukraine, and took down several government and bank services in a potent hit on the eastern European country’s finance system in 2022.
Rathi warned that ensuring similar attacks on Britain’s financial plumbing don’t affect market integrity will become “an increasing feature of the risk landscape” for the City watchdog in the years ahead.
Rathi: FCA needs more gilt trading data
The watchdog boss also sounded the alarm on the rapid evolution of the structure and participants of government debt markets, which he said had become disconcertingly volatile and opaque.
The global market for sovereign debt passed $100 trillion at the start of this year, and the spectre of rapid bond sell-offs has become a core component of western lawmakers’ decision-making.
Rathi told peers the UK had seen a significant “shift in the composition of [its gilts] market”, highlighting that over a quarter of trades in government debt are made by hedge funds, an increasing number of which are not from Britain.
“The composition of the market has changed [and is] totally aligned with removing data which we do not need,” he said, referencing the government’s push to bear down on overly burdensome regulation on businesses. “But there are some areas – and I call this out as one – where we need more data, and we need it faster, because the markets are faster. And we need more real-time data on trading in some of these fixed income markets so that we can understand what is going on [and] do our job for the whole system.”
Rathi’s comments on hedge funds’ gilt positions echo those made by the Bank of England in its recent Financial Stability Report. Bank officials wrote that government bonds risked being hit by a tidal wave of forced selling from highly leveraged hedge funds, which have been taking up an increasingly oversized influence in the market.
The paper said that a “small number” of hedge funds account for over 90 per cent of borrowing to leverage gilt trading, which could trigger a brutal sell-off redolent of the fire sale in government bonds that took place under Liz Truss’s ignominious time in Downing Street.