June 04, 2019

IOSCO published a report that examines instances of regulatory-driven fragmentation in wholesale securities and derivatives markets and considers what actions regulators can take to minimize its adverse effects. The report focuses on market fragmentation that arises as an unintended consequence of financial regulation. It provides examples of market fragmentation that IOSCO members consider to be significant and potentially harmful to the oversight and supervision of financial markets. Based on the analyses, the report proposes potential measures that IOSCO and relevant national authorities could explore to mitigate the risk and potential adverse effects of fragmentation on global securities markets.

The report further examines the progress made by IOSCO members in using deference and analyzes the regulatory mechanisms and tools associated with this concept (example, passporting, substituted compliance, recognition or equivalence). In doing so, the report follows up on a 2015 IOSCO report on cross-border regulation and seeks to identify the remaining challenges that can restrict cross-border activities. Regulators have become increasingly aware of the risks associated with unintended market fragmentation and are cooperating more to mitigate its effects through deference and its associated tools. Also, regulators have developed novel processes to work multilaterally to the benefit of the markets they oversee. Nevertheless, several challenges remain and strengthening cooperation between authorities could further assist in addressing adverse effects on the financial system stemming from market fragmentation.

The concerns of IOSCO about the risks of fragmentation are shared by other international organizations and policymakers. These entities include the G20, which has made market fragmentation a top priority, and FSB, which also published a paper on market fragmentation. The report proposes potential measures that IOSCO and relevant national authorities could explore to mitigate the risk and potential adverse effects of fragmentation on global securities markets. These measures include ways to foster further mutual understanding of one another’s legislative frameworks, deepen existing regulatory and supervisory cooperation, and consider whether there are any good or sound practices that can be identified regarding deference tools. The IOSCO Board will decide on its approach to these next steps in the second half of this year.

 

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Keywords: International, Banking, Securities, Market Fragmentation, Cross-Border Regulation, Derivatives, IOSCO

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