Countries have made substantial progress toward implementing capital markets regulatory reform, but important gaps remain and new challenges have raised the bar.
Capital markets are like engines that help power the global economy:
they perform best with regular tune-ups. In this spirit, the major
regulatory overhaul following the global financial crisis was aimed at
shoring up key segments, from over-the-counter derivatives to investment funds and market infrastructure, closing fault lines revealed by the crisis.
But now, even after historic enhancements in recent years, countries
still need to keep pushing to lower risks and strengthen the tools to
manage future crises, and ultimately to reduce fluctuations tied to
economic cycles.
So, to better gauge progress on reforms to market regulation and what further gains are needed, our latest research surveys IMF financial sector assessment programs in several countries over the past seven years.
Financial-sector assessments are still uncovering shortcomings despite progress since the global financial crisis.
These regular reviews tracked risks, vulnerabilities, and
arrangements for market oversight and crisis management, with a focus on
safety nets to manage any potential failures of major firms.
They also looked at the resilience of central counterparties, the
entities that function as buyer to every seller and seller to every
buyer to guarantee performance of open contracts, which have grown in
prominence under derivatives-clearing reforms. The reviews also examined
the vulnerability of asset managers like money market funds and bond
funds, and whether trading venues beyond traditional exchanges are
adequately regulated.
Making progress
One main reason we see a need for greater reform even after the
significant progress seen in recent years is that it has been
accompanied by rapid growth of financial services firms that don’t have
banking licenses or take deposits, such as insurers, mutual funds, and
exchanges.
Nonbank financial intermediation, as it’s known, has grown to
represent almost half of the assets of the global financial system,
thereby playing a much bigger role in the global economy . Regulators
must better ensure that its vulnerabilities and business models don’t
amplify future shocks to markets and financial stability.
Applied to the asset management sector, a key priority is to broaden
the range of liquidity management tools that are available to investment
funds managers.
Another priority for regulators is to reinforce financial safety nets
and crisis-management arrangements, while a third is to strengthen
early warning capabilities, for example, through enhanced stress-testing
tools and capacities.
Emerging issues
Issues like these are challenging on their own, but securities
regulators can’t limit themselves to just implementing the capital
markets reform agenda that followed the global financial crisis. Rather,
their priorities must also evolve and broaden in-step with the
financial systems they safeguard....
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