Nikhil Rathi: Britain can lead in this era of ‘predictable volatility’

‘Things that used to be one-in-10-year events now happen every month’

• Pramod Thomas
• 10 October, 2024

By: Pramod Thomas

THE UK has a significant opportunity to solidify its leadership role in global financial markets in an era of volatility, the head of country’s financial watchdog has said.

Nikhil Rathi, chief executive of the Financial Conduct Authority, highlighted that the country’s deep capital and liquidity pools, developed over centuries, are critical drivers of economic growth and development.

Rathi said the UK is well-positioned to once again set the benchmark for global markets as the financial landscape is constantly evolving,

Speaking at the FCA International Capital Markets Conference 2024, Rathi noted that as the world navigates an era of “predictable volatility,” the UK’s potential for leadership is evident. However, he stressed that achieving this goal will require decisive action from both regulators and market participants.

Noting a surge in the frequency and intensity of market shocks, he underscored that market volatility is now interconnected across asset classes, from equities to cryptocurrencies, with far-reaching consequences.

Drawing parallels between the unpredictability of tennis and financial markets, he added that volatility has become a predictable feature of today’s financial landscape.

During his speech, Rathi stressed the need to nurture liquidity in the markets.

“Liquidity is essential for market agility, and the current regulatory framework, which often applies uniform rules to both large global banks and smaller firms, can sometimes stifle this. The old adage of “same business = same risk = same treatment” is no longer suitable in today’s complex financial environment,” he said.

He revealed that the FCA is exploring adjustments to improve market liquidity by tailoring regulations for specialised trading firms that do not hold retail deposits.

“The success of non-bank traders in capturing flows across US equities serves as an example of how custom rules can work. By tailoring regulations, the FCA aims to free up capital, encourage new entrants, and boost competitiveness, all while maintaining market integrity,” he said.

“The FCA is calling for a shift from reactive to proactive regulation, focusing on creating an environment where firms can compete and grow. Rather than stepping in only when crises arise, the regulator wants to use a wide range of metrics to track authorisations, operational efficiency, and regulatory burden.”

As an example, Rathi pointed out the UK regulator’s role transitioning from London Interbank Offered Rate (LIBOR) to risk-free rates like Sterling Overnight Index Average (SONIA) and Secured Overnight Financing Rate (SOFR).

LIBOR was a widely used benchmark interest rate that determined interest rates for financial contracts around the world.

According to Rathi, this ‘monumental’ shift eliminated £306 trillion of LIBOR-linked risk and involved over 16,000 legal entities from 99 countries, showcasing the power of international cooperation.

He added, “A forward-thinking approach to risk is another critical area of focus. The UK markets have remained relevant by being open to reform, and the FCA is challenging long-held principles to seize new opportunities in this era of volatility. Reforms to listing rules, incentivising pension funds to take greater risks, and simplifying prospectus requirements are just a few examples of how the FCA is driving innovation.

“The UK must also invest in its financial infrastructure and embrace technological advancements. Cybersecurity is becoming increasingly vital, with 50 per cent of UK businesses experiencing cyberattacks in 2023, up from 39 per cent in the previous year. At the same time, innovation in areas like settlement times and tokenisation (a process that replaces sensitive data with a unique, non-sensitive identifier, or ‘token’) could unlock new market opportunities.”

He further said that the FCA is also keen on embracing AI without rushing into new rules, preferring to rely on existing frameworks to balance progress with security and fairness.

Rathi urged a collaborative approach to tackling market challenges, stressing that no single entity can address these risks alone. “Volatility per se is not the issue, but excessive moves that dislocate prices from fundamentals are the central concern. We need to engage deeply with all corners of the market to manage these shocks,” he said.