A letter from Randal K. Quarles, the Chair of the Financial Stability Board (FSB), discusses enhancing the resilience in non-bank financial intermediation (NBFI) and addressing challenges in cross-border payments. The letter was addressed to the G20 Finance Ministers and Central Bank Governors ahead of their meeting on October 13, 2021. The letter notes that FSB has delivered, to the G20, a final report with policy proposals to enhance money market fund resilience and a report on the progress made on the implementation of the FSB’s high-level recommendations for the regulation, supervision, and oversight of “global stablecoin” arrangements. These reports are initial steps in what will be multi-year programs on non-bank financial intermediation and cross-border payments focused on ensuring that the global financial system remains resilient in the face of rapid innovation and technological changes.
The letter to G20 notes that, following the market turmoil in March 2020, FSB agreed on an ambitious multi-year workplan to enhance non-bank financial intermediation resilience. In the area of margin calls, the non-bank financial intermediation work program has identified the need for better understanding of the impact that margin calls could have, including from steps that market participants took to meet these calls. In response, the Committee on Payments and Market Infrastructures (CPMI), the International Organization of Securities Commissions (IOSCO), and the Basel Committee on Banking Supervision (BCBS) will shortly complete an examination of margin calls in centrally cleared and non-centrally cleared derivatives markets and the preparedness of market participants to meet margin calls through their liquidity management. This will provide the standard-setting bodies with a firm foundation from which to further explore the questions raised through this analysis. In addition to the ongoing work, FSB will leverage insights from this analysis to develop a systemic risk perspective on non-bank financial intermediation and policies to address such risks. Further understanding of systemic risks in non-bank financial intermediation will involve analysis of interconnections and how risks propagate. The letter also notes that FSB will also be submitting its latest work on cyber incident reporting, which brings together cross-sectoral expertise to explore whether harmonization in cyber reporting can be achieved and what additional work needs to be undertaken.
The report on policy proposals to enhance money market fund (MMF) resilience reflects public feedback received on a consultative version of the report, which the FSB published in June 2021. The policy proposals form part of the work program on non-bank financial intermediation and are intended to inform jurisdiction-specific reforms. MMFs are subject to two broad types of vulnerabilities—that is, sudden and disruptive redemptions and challenges in selling assets under stressed conditions. The report considers the likely effects of a broad range of policy options to address these vulnerabilities, by examining how these options would affect the behavior of MMF investors, fund managers, and sponsors as well as the options’ broader effects on short-term funding markets, including through impact on the use of potential substitutes for MMFs. Policy options are grouped according to the main mechanism through which they aim to enhance MMF resilience. The policy toolkit includes mechanisms to impose on redeeming fund investors the cost of their redemptions, absorb credit losses, address regulatory thresholds that may give rise to cliff effects, and reduce liquidity transformation. The report also includes considerations on how to prioritize options in the context of identified vulnerabilities; and how authorities can combine options to address all MMF vulnerabilities prevalent in their jurisdiction. FSB will review progress of member jurisdictions in adopting reforms to enhance MMF resilience. Under this review, a stocktake is to be completed by end-2023 and this will be followed with an assessment of the effectiveness of these measures in addressing risks to financial stability by 2026. FSB and IOSCO also intend to conduct follow-up work, complementing MMF policy reforms, to enhance the functioning and resilience of short-term funding markets.
The progress report on the implementation of the FSB High-Level Recommendations on stablecoin arrangements discusses takes stock of the implementation of the FSB high-level recommendations across jurisdictions and describes the status of the review of the existing standard-setting body frameworks, standards, guidelines, and principles in light of the FSB high-level recommendations; the report also identifies areas for consideration for potential further international work. The report notes that, overall, the implementation of the FSB high-level recommendations across jurisdictions is still at an early stage. Jurisdictions have taken, or are considering, different approaches towards implementing the high-level recommendations, which could give rise to the risk of regulatory arbitrage and harmful market fragmentation. The report also notes that standard-setting bodies are assessing whether and how existing international standards and principles may apply to stablecoin arrangements and, where appropriate, adjusting them in light of the FSB high-level recommendations. The report stresses that a number of issues may not be fully covered by existing standards and principles and that gaps should be addressed in a holistic manner that is coordinated across sectors. The issues that may warrant further further consideration and work include conditions for qualifying a stablecoin as a “global stablecoin”; prudential, investor protection, and other requirements for issuers, custodians, and providers of other global stablecoin functions; redemption rights; cross-border and cross-sectoral cooperation and coordination; and mutual recognition and deference. The review to be completed in July 2023 will identify how any gaps could be addressed by existing frameworks and will lead to an update of the FSB recommendations, if needed.
Keywords: International, Banking, BFI, Cross Border Payments, G20, Money Market Funds, Margin Calls, Derivatives, Global Stablecoins, BCBS, IOSCO, FSB
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