New US laws on governing financial markets are a concern because they could concentrate power in the hands of a small number of players, a senior Australian central banker says.
Reserve Bank of Australia (RBA) assistant governor (Financial Markets) Guy Debelle also says conditions remain fragile on financial markets, but have improved since late 2008 and early 2009.
Speaking at the Westpac Macro Strategy Forum in Sydney, Dr Debelle said proposed laws in the US could concentrate power in a smaller amount of market participants, but the move could be a good thing for financial instruments.
"I think there's a risk that some of these changes are going to concentrate the market in the hands of a small number of players, and the market is already pretty concentrated," Dr Debelle said in response to a question.
"These ... are by-and-large probably a good thing for a lot of instruments, provided that we're comfortable that the exchange has got the appropriate capacity and appropriate capitalisation."
A raft of financial regulation laws have been debated by both houses of US congress since the worst of the global financial crisis abated late last year.
Last week, Goldman Sachs closed its principal strategies business to comply with a new provision in a financial overhaul bill signed into law earlier this year by President Barack Obama, Dow Jones News reports.
The law restricts proprietary trading, which involves putting a company's own capital at risk in trades.
Dr Debelle said there was potential for people to be squeezed out of exchange markets as bigger companies take on more business.
"There is concern that those people who have more direct access to that exchange, so those large global financial institutions, are going to gain an increasing share of that business," he said.
"It's not necessarily going to be worthwhile for, say, an Australian customer going through Westpac who then have to go through one of those global banks to access the exchange, rather than be able to access it directly.
"There is some risk there might be an increase in market concentration beyond what is already a reasonably concentrated market, so that's one thing that we are certainly thinking about.
"I think that's one development you may well see over the next year or two."
Dr Debelle said turnover in foreign exchange markets had increased 30 per cent since the lows of early 2009, with global turnover averaging $US4 trillion a day in April 2010, 20 per cent higher than three years before.
Among the major currencies, the Canadian dollar experienced a 50 per cent increase in turnover, compared with a 40 per cent increase for the Australian unit.
The Australian dollar was now the fifth most traded currency, overtaking the Swiss franc, while the AUD/USD (Australian dollar-US dollar) remained the fourth most traded currency pair, he said.
An increase in the use of foreign exchange swaps was likely to be linked to the lift in risk appetite and the appreciation of the Australian dollar over the past year, Dr Debelle said.
Australian banks used cross-currency swaps to hedge the exchange rate risk associated with their foreign currency bond issuance, he said, while other markets were unlikely to experience a return to pre-crisis conditions soon.
But Dr Debelle said this was "generally a good thing as those conditions were not sustainable".
Australian financial markets had performed better than other markets in the past three years, he said.