Financial Risk Outlook

Somewhat later than usual the FSA has published its 2010 Financial Risk Outlook. The FSA’s 2010/11 Business Plan (‘BP’) will follow in the next few days. It should cover the period 1/4/10 to 31/3/11, although page 73 of the FRO does refer to 2011/12.

The purpose of the FRO is for the FSA to set out what it sees as the main risks facing firms and the regulatory system and identify challenges. The BP in turn will explain the priorities arising from the FRO and the resourcing requirements. As such the documents will tell us the areas the FSA will be concentrating on.

The first two sections concern themselves with macroeconomics and the prudential challenges facing banks and building societies. The third section looks at market risks. Market abuse features with a warning that the FSA will continue to undertake both enforcement measures and work on prosecuting criminal actions. The regulator emphasises the importance of suspicious transaction reports and transaction reporting in its fight against market abuse and reminds us of the fines against Mark Lockwood and Barclays for failures in these areas.

The FSA also notes that it continues to see leaks of inside information during public takeovers. Other areas touched on in this section include high frequency trading (which is estimated to account for 30-50% of equity trading volume in the EU); the impact of EU regulation on credit rating agencies (some ratings produced by external agencies will not be allowed to be used for calculating capital requirements under the CRD); and the need to improve post-trade transparency in OTC markets.

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