Bank of England official sees drift to more exchange trading on FX, bonds

By Patrick Graham and John Geddie

LONDON, Feb 25 (Reuters) - More business in the world's giant bond and currency markets may move onto exchanges as part of structural changes underway amid a host of new regulation and official reviews, the Bank of England's Director for Markets Strategy said on Wednesday.

Andrew Hauser heads the secretariat for the Fair and Effective Markets Review being conducted by the BoE (Shenzhen: 200725.SZ - news) with other official UK financial bodies.

Banks and investors are looking keenly at the review for direction on the future structure of wholesale capital markets.

Some industry figures have speculated the review will point the way to more trading in the largely over-the-counter bond and currency markets being pushed onto centralised exchanges.

Speaking at an Association for Financial Markets in Europe conference, Hauser was asked if the market would move more towards an agency model where banks do not take on risk but just seek out counterparties, and to more trading on exchanges.

"Clearly it is the billion dollar question, particularly on fixed income markets," he said.

"We do need the market-maker model to some degree. (But) For less liquid assets there may be the case for some of this business to move onto platforms or exchanges."

The discussion in the industry is widely understood not to encompass the 2 trillion a day market in spot foreign exchange, a huge cash cow for some of the world's major banks and a host of platforms and technology providers.

On that front, Hauser stressed that he did not expect any shift would refer to markets that are already extremely liquid and competitive.

In a speech earlier, he left the door open to more formal regulation of markets but said the "bar was high" for any efforts to impose structural changes.

Companies with formal trading venues, or clearing operations, including Nasdaq, Deutsche Boerse (LSE: 0H3T.L - news) -owned Eurex and CME are investing heavily in creating exchange-traded foreign exchange products. They say that there is growing demand from asset managers hit by a rise in costs of the services they get from banks as lenders adjust their business models.

"The death of the market maker model is overplayed. It is not one or the other," Hauser said.

"Clearly the pricing of risk was too low and it has returned to more sustainable levels ... The market maker model is becoming more selective, people (in banks) are looking more ruthlessly at businesses." (Writing by Patrick Graham; Editing by Toby Chopra)