Speech by Sarah Pritchard, executive director of markets, at the Investment Association Roundtable.
At this time of year, it’s almost impossible not to think about spring. Warmer weather, a bit of sun. It’s always a joy to see the world come back to life after a dull, grey winter. It might be a cliché comparison, but I find that the world of financial markets is not dissimilar to a garden. Certainly, as a regulator, we think about markets as a gardener might think about their plants – we want them to grow and thrive, we want them to be able to manage changing or uncertain weather conditions, and we want to see plants return year after year.In many ways, I think this is a helpful way to frame our thinking about leverage. In the same way that a garden needs water and nutrients to flourish, leverage underpins a great deal of essential activity in financial markets. As the gardeners amongst you will know, though, measurement is key – too much water or the wrong balance of nutrients have the opposite effect. And the amount of water or nutrients required at any time needs to be calibrated according to weather predictions and seasonal conditions.Over the past few years, financial regulators globally have been acutely aware of this need for balance – focusing on ensuring that NBFI entities have access to leverage in the ways, means, and quantities that allow the markets to prosper. And with sufficient mechanisms in place to monitor and measure it.