IMF: New challenges raise the bar for capital market regulation

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As various challenges are facing the global economic community, facts have emerged that although the regulation of financial markets has been tightened around the world, there are still a number of gaps that need to be filled to make the market stronger. and more attractive. According to an International Monetary Fund (IMF) blog report researched by Cristina Cuervo, Jennifer Long and Richard Stobo, countries have made substantial progress in implementing capital market regulatory reform, but significant gaps remain and new challenges have raised the bar. The study noted that capital markets are like engines that help propel the global economy: they work best with regular tune-ups. With this in mind, the major regulatory overhaul after the global financial crisis aimed to strengthen key segments, from OTC derivatives to investment funds and market infrastructures, by closing the loopholes revealed by the crisis. He observed that, but now, even after historic improvements in recent years, countries still need to continue to push to reduce risks and strengthen tools to manage future crises and ultimately reduce price-related fluctuations. economic cycles. “Thus, to better assess the progress of market regulation reforms and the additional gains needed, our latest research examines the IMF’s financial sector assessment programs in several countries over the past seven years. “Financial sector assessments still reveal shortcomings despite the progress made since the global financial crisis. “These regular reviews tracked risks, vulnerabilities and market surveillance and crisis management arrangements, with a focus on safety nets to manage any potential failures of large companies. “They also looked at the resilience of central counterparties, the entities that function as buyer-to-seller and seller-to-buyer to ensure execution of open contracts, which have come to prominence under product clearing reforms. The reviews also looked at the vulnerability of asset managers such as money market funds and bond funds, and whether trading platforms beyond traditional exchanges are properly regulated,” the report states.

Make progress

“One of the main reasons why we see the need for greater reform even after the significant progress we have seen in recent years is that it has been accompanied by rapid growth of financial services companies that have not not licensed by banks or who do not take deposits, such as insurers, mutual funds, and exchanges.” Non-banking financial intermediation, as it is known, has grown to represent nearly the half of the assets of the global financial system, thereby playing a much larger role in the global economy.”Regulators need to better ensure that its vulnerabilities and business models do not amplify future shocks to markets and financial stability.” Applied to the asset management industry, a key priority is to expand the range of liquidity management tools available to investment fund managers.” Another priority for regulators is to strengthen financial safety nets and crisis management arrangements, while a third is to strengthen early warning capabilities, for example, through improved tools and testing capabilities,” adds the report.

Emerging issues

Research found that issues like these were difficult on their own, but securities regulators cannot limit themselves to simply implementing the financial market reform agenda that followed the global financial crisis. . On the contrary, their priorities must also evolve and expand along with the financial systems they protect. “This is particularly true in capital markets, where cyber resilience, fintech and climate change are key emerging issues. Trading platforms are at the heart of cybersecurity, as supervisors and market participants aim to build their technological and operational resilience to minimize potential market disruptions. And the promise of fintech also involves risks in crypto assets and decentralized finance. “Regulators must also be vigilant about abandoning benchmarks such as the London Interbank Offered Rate in favor of new benchmarks for interest rate swaps and other key financial contracts. Finally, the impact of climate change will need to be appropriately reflected in the financial statements, valuations and information about issuers on which investors depend.

Appropriate perimeter

“A key priority highlighted by this far-reaching future work program is to ensure the adequacy of the scope of financial regulation so that it covers all relevant actors, activities and instruments. “Our assessments of the financial sector still reveal significant shortcomings despite all the progress made since the onset of the global financial crisis a decade and a half ago,” the blog notes. He added that some countries, for example, seemed to have regulatory loopholes for asset management companies. In addition, policymakers need to more explicitly consider which derivatives to regulate as part of risk management efforts related to commodities, climate, emissions, and other carbon-related instruments. “This range of challenges raises concerns given the insufficient resources available to supervisors in even some of the world’s largest and most sophisticated markets, which is confirmed by IMF financial sector assessments. Post-crisis reforms involved a significant expansion of regulatory scope and raised expectations for the oversight needed to assess and mitigate risk, but securities regulators rarely saw a commensurate increase in resources. “Emerging challenges such as new market technologies and expanding regulatory scope make it important for regulators to have a wider range of specialized expertise and to ensure that their techniques and technologies of monitoring keep pace. Limited resources in some jurisdictions are compounded by a lack of operational independence of authorities, which limits their ability to effectively oversee and respond to risks. “Therefore, we must continue to prioritize our efforts to make further progress on these key aspects of the institutional and regulatory framework that underpins capital markets,” notes the research.

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