Market Fragmentation

International cooperation and coordinated action by financial authorities have strengthened the global financial system in the aftermath of the global financial crisis. A programme of regulatory reforms agreed by the G20 Leaders addressed many of the fault lines exposed by the crisis; the FSB and standard-setting bodies (SSBs) have established programmes to monitor progress in their implementation and evaluate its effects. Authorities have also intensified their international cooperation. There are, however, concerns that some markets may be fragmented along jurisdictional lines. Market fragmentation can arise for a number of reasons, including differences in national regulations and supervisory practices governing financial activities that are international in nature. This, along with differences in both the substance and timing of implementation of international standards, may disincentivise or prevent market participants from undertaking certain cross-border activities.

The 2019 Japanese G20 Presidency proposed that the FSB explore issues around market fragmentation and consider tools to address them, where appropriate. In its June 2019 report on market fragmentation the FSB identified several areas for further work to address market fragmentation. These focus on facilitating further analysis and discussion of approaches and mechanisms for more efficient and effective cross-border cooperation amongst authorities. Work included: exploring ways to, where justified, enhance the clarity of deference 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; and 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.

In October 2020 the FSB published an update on its ongoing work in this area. It noted that:

• Deference. The International Organization of Securities Commissions published a Report on Good Practices on Processes for Deference in June 2020 that should help authorities to mitigate the risk of unintended, regulatory-driven, fragmentation in wholesale securities and derivatives markets.

• Pre-positioning of capital and liquidity. FSB members are continuing work related to the distribution of resources within global systemically important banks (G-SIB) having regard to the need to achieve a balance between certainty for host jurisdictions and flexibility to deploy resources where needed within a group in times of stress. The FSB is also working on identifying ways to further promote effective cooperation and coordination in crisis times.

• Regulatory and supervisory coordination and information sharing. Regulatory and supervisory coordination and information sharing have focused on policy measures taken in response to COVID-19. The FSB has established a repository of regulatory and supervisory policy measures taken in its member jurisdictions in response to the COVID-19 pandemic. The FSB is also exploring potential ways to facilitate convergence in reporting of data to authorities.

• “Too-big-to-fail” (TBTF) evaluation. The FSB has publicly consulted on its evaluation on the effects of TBTF reforms for systemically important banks. The evaluation finds no evidence that the implementation of reforms has reduced cross-border lending.