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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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