June 04, 2019

FSB published a report that examines market fragmentation arising from regulatory and supervisory policies and identifies several work areas to address this issue. The report focuses on instances where reducing market fragmentation might have a positive impact on financial stability or might improve market efficiency, without any detrimental effect on financial stability. The report was delivered to G20 Finance Ministers and Central Bank Governors ahead of their meetings in Fukuoka on June 08–09, 2019.

In response to a proposal by the Japanese G20 Presidency, FSB explored issues around market fragmentation and considered tools to address them, where appropriate. The report looks at some examples of financial activities where supervisory practices and regulatory policies may give rise to market fragmentation. It discusses potential trade-offs that authorities have considered between the benefits of increased cross-border activity and a need to tailor domestic regulatory frameworks to local conditions and mandates. Areas the report examines include the following:

  • Trading and clearing of over-the-counter (OTC) derivatives across borders
  • Banks’ cross-border management of capital and liquidity
  • Sharing of data and other information internationally

The report lays out approaches and mechanisms that may enhance the effectiveness and efficiency of international cooperation and help to mitigate any negative effects of market fragmentation on financial stability. The report identifies several areas for further work to address market fragmentation and will review the progress on the work in November 2019. The identified work areas are expected to facilitate further analysis and discussion of approaches and mechanisms for more efficient and effective cross-border cooperation among authorities. Such areas for further work include the following:

  • Exploring ways to, where justified, enhance the clarity of deference and recognition processes in derivatives markets
  • Strengthening the understanding of approaches by supervisory and resolution authorities towards pre-positioning of capital and liquidity by international banks
  • Considering ways to enhance supervisory communication and information sharing, including approaches and mechanisms to avoid future fragmentation
  • Considering whether there is evidence of market fragmentation with observed consequences for financial stability as part of the FSB’s ongoing evaluation of the effects of too-big-to-fail reforms

 

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Keywords: International, Banking, Securities, Market Fragmentation, G20, Financial Stability, Cross-Border Activities, OTC Derivatives, Too Big to Fail, FSB

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