Markets relaxed as fears of millennium bug meltdown prove to be unwarranted

Fears of a wholesale shutdown in financial markets because of millennium bug fears are fast receding amid record equity volumes and signs that measures put in place by the Bank of England to help liquidity in wholesale markets have had the desired effect.

Fears of a wholesale shutdown in financial markets because of millennium bug fears are fast receding amid record equity volumes and signs that measures put in place by the Bank of England to help liquidity in wholesale markets have had the desired effect.

Brokers say that they expect the usual seasonal fall in end-of-year activity to start to kick in later this week.

But while many believe the tail-off in volumes will be more marked than usual, they say it will be as much to do with the extraordinary length of the break this year, and the exhaustion factor after a spectacularly good year, as any specific worries about the millennium bug.

Roger Bates, who heads Y2K preparations at Deutsche Bank in London, said: "With the end of December fast looming, we thought people would be drawing in to their shells. But confidence has stayed at a higher level than anticipated."

Robin Hubbard, chief economist at Chase in London said: "We are expecting a big tail-off in liquidity but not a complete seizure in the market."

In the UK equity market, dealers have been focusing on tomorrow as the last day for booking share trades for settlement before the Christmas holiday.

However, institutions say they see little reason not to stay in the market if they the see opportunities right up until the last trading day of the year.

The actual picture is a long way from what was expected midway through the year, when brokers and bankers were rushing to get corporate deals away in belief that investing institutions would shut up shop on 30 October.

Although a number of initial public offerings were pulled for that reason in late summer, in practice appetite for new issues has been far stronger than anticipated, with three expected in the UK alone next week.

Keith Skeoch, chief investment officer at Standard Life, said: "None of the fears of trading drying up have materialised at all."

After the record breaking run of the past few weeks, institutions are reluctant to commit themselves to withdrawing from the market when business is so brisk.

However, a handful are said to have chosen to deal through a smaller number of brokers over the millennium period as a precautionary measure.

The one area of the markets where Y2K has had an impact is on bond markets where volumes have definitely suffered over recent months.

However, derivatives markets are still going strong. In the swaps and money markets, rates have actually improved over recent weeks in response to a range of measures by central banks, including a massive expansion in the collateral eligible for repo auctions.

Derek Tullet of Tullet & Tokyo, the brokerage, said: "It is fine at the moment. Seriously, it looks very good."

Stock lending by institutions to hedge funds and proprietary trading desks - another area of activity that was thought likely to be hit by millennium bug fears - shows little sign of drying up either.

In the latest report on Financial Preparations for the Year 2000, the Bank of England said: "Overall the Bank is confident that, though markets may be thinner than normal at the end of the year, they will continue to function in an orderly way.

"Both market firms and evidence of traded-market prices support that view."