Financial institutions are under constant pressure to reduce costs, improve operational efficiency, adapt to regulatory changes and grow their business. NRI believes that a combination financial knowledge and information technology are crucial to the industry’s growth and development. Through our lakyara reports, NRI identifies the various capital markets and IT issues impacting our clients and the future of their business.
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Although proprietary trading systems can often execute trades at better prices than those available on exchanges, this fact is not widely known in Japan. However, with market infrastructure being progressively upgraded to facilitate PTS access, PTSes can no longer be ignored from the standpoint of best execution.
From China’s standpoint, “imbalances” and monetary policy flexibility do not provide imminent economic rationale for more flexible exchange rate, given the rate elasticity of the trade and the state of its financial markets. There is also the risk of accelerating capital inflows or destabilizing the dollar. But if China still decides to review the peg based on political factors or long-term merits, it would not like to trigger (1) expectations of CNY appreciation or (2) a collapse of the dollar. To satisfy the first, adopting a currency-basket provisionary in a discretionary manner would be an option, as discussed in the markets. To satisfy the second, China should conduct it when the dollar is rising.
The proposed changes to financial regulation require the Fed to obtain advance approval from the new Council before providing funds under Section 13-3 of the Federal Reserve Act. They also include a ban on the rescue of individual institutions. While these reflect doubts about some rescues during the financial crisis, I fear they might prevent the Fed from fulfilling its role as a lender of last resort (LOLR), for two reasons: (1) financial institutions other than banks could become a source of systemic risk, and (2) with fewer LCFls in existence, this section, in my view, would include strengthening the inspection system (e.g. third-party inspections, etc.) and establishing limits on the loan term.
Chinese Capital Markets
In terms of size, Chinese securities markets now rival their counterparts in developed countries, but they still differ substantially from Japanese, European, and American markets in two respects. First, securities settlement and clearing is extremely centralized in China. Second, Chinese markets have yet to develop much diversity of investment instruments. Nonetheless, Chinese securities markets will surely evolve toward convergence with developed countries' markets through changes in government policy and institutional and individual investor behavior.