On 4 June 2019, the Financial Stability Board (FSB) published a report on market fragmentation. The report was delivered to G20 Finance Ministers and Central Bank Governors ahead of their meetings in Fukuoka on 8-9 June 2019.
The report looks at some examples of financial activities where supervisory practices and regulatory policies may give rise to market fragmentation (either intended or unintended). 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. The areas the report examines are the trading and clearing of over-the-counter (OTC) derivatives across borders; banks’ cross-border management of capital and liquidity; and the sharing of data and other information internationally.
The report does not assess the significance of market fragmentation in specific areas or evaluate possible effects on financial stability or market efficiency. Instead, it discusses in general terms the potential linkages between market fragmentation and financial stability in different areas.
The report identifies several areas for further work to address market fragmentation. Such areas for further work include: 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; 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.
The FSB will review progress in the above areas in November 2019.