According to the industry regulator, changes to the âprudential requirementsâ for trading among banks are essential if the financial system is to recover effectively from the global credit crisis.
The comments follow the publication of a paper by the FSA discussing a number of recommendations to improve how trading is regulated.
Paul Sharma, FSA director of prudential policy, said: âThe financial crisis has highlighted that, for trading activities in particular, an over-reliance on the principles of efficient financial markets can lead to severe consequences when risks are misunderstood at a system-wide level.
âThe balance needs to be redressed to ensure that risks posed to the system as a whole are more adequately reflected in the structure of prudential regulation."
In the paper, the FSA calls for improvements to be made to how firms measure risk and increased emphasis on ensuring the accuracy of valuations for trading positions.
Changes to the capital framework were also recommended in the paper.
Feedback on the report is expected to be released by the FSA during the first half of 2011.
By Jim Ottewill