## scmrnpgea ## Source details **Canonical URL:** [scmrnpgea](https://www.imf.org/-/media/files/publications/dp/2022/english/scmrnpgea.pdf) ## Other formats - [Markdown version](/-/media/files/publications/dp/2022/english/scmrnpgea.pdf.md) - [Structured JSON version](/-/media/files/publications/dp/2022/english/scmrnpgea.pdf.json) --- ### Executive Summary — capital markets role and reform context - Capital markets support economic activity and hedging; resilience is vital to financial stability. - Nonbank financial intermediation (NBFI) grew significantly and rapidly over the last two decades, increasing systemic relevance. - Post-GFC reforms targeted: - OTC derivatives: incentivize central clearing through CCPs and higher capital where not centrally cleared. - Liquidity in MMFs and other investment funds. - Regulation of FMIs, including CCPs. - Historical transmission-risk episodes cited: Long-Term Capital Management recapitalization in 1998; Lehman Brothers failure in 2008 with significant OTC positions; Reserve Primary money market fund “breaking the buck.” - Key statistics and scale indicators: - The largest capital market (United States) accounts for 73 percent of that country’s funding of nonfinancial firms. - Notional amount of interest rate derivatives contracts outstanding in the second half of 2020: USD466.5 trillion. - U.S. GDP: USD22.94 trillion; China’s GDP: USD16.86 trillion. - LIBOR cessation and benchmark transitions test international collaboration and controlled cessation of systemically important benchmarks. ### Executive Summary — scope, progress, and gaps - Basis of analysis: common themes from FSAP assessments during 2015–20 covering securities and derivatives markets, infrastructures, intermediaries, and participants. - Progress since GFC: significant reforms implemented; remaining gaps include reducing procyclicality, strengthening safety nets, crisis management, and supervisory capacity amid rapid NBFI growth. - Asset management findings: - Regulatory gaps in some countries impede sizing of financial stability risks. - Securities regulators often lack access to a wide range of regulatory tools for preventing/managing systemic liquidity shocks. - Enhanced stress testing by industry and supervisors is commonly needed. - Market intermediaries: - Progress in capital requirements and safety nets for significant dealers, but clarity between banking and securities arrangements is needed. - CCPs and FMIs: - Margin models may require further calibration to avoid exacerbating procyclicality. - Direct access for CCPs to central bank liquidity merits further examination; consideration could extend to NBFI broadly. - Greater international coordination on CCP crisis management is needed given cross-border clearing. - Market infrastructure and trading venues: - Regulatory scope extension beyond traditional exchanges continues; not all potentially systemic infrastructure (e.g., benchmarks) may be identified and regulated. ### Institutional framework, data, and supervisory capacity - Repeated FSAP finding: supervisory authorities often insufficiently resourced—even in large, sophisticated markets. - Key implications: - Regulators require wider specialist expertise and upgraded supervisory techniques and technology (SupTech). - Lack of operational independence in some jurisdictions compounds resource constraints. - Perimeter issues: - Ongoing assessment needed to ensure coverage of actors, activities, instruments (exchange-traded and OTC derivatives, alternative trading venues, asset managers, systemically important benchmarks). - Coverage of crypto assets will likely become relevant for more jurisdictions as DLT and DeFi evolve. - Supervisory priorities: - Enhance independence, resources, and capabilities of securities and derivatives regulators. - Improve data completeness and robustness. - Strengthen liquidity management tools, stress-testing of MMFs and bond funds, and interconnectedness analysis. - Implement and reinforce central clearing where mandated; increase CCP resilience through robust margining and resolution arrangements. - Monitor adoption of new technologies in FMIs and address operational resilience of trading venues. ### Emerging issues highlighted (summary) - Fintech and cyber-resilience: regulators embed cyber-resilience in supervision; DeFi and smart contracts pose supervisory and accountability challenges. - Benchmark transition: LIBOR cessation required managed transition and exposed legacy contract risks. - Climate transition and “green” finance: need for accurate disclosure, valuation, and accounting to avoid financial-stability risks from climate-related asset repricing. - Bond markets, accounting, and business models: pandemic stress episodes, corporate failures, changing retail trading models (zero-commission, payment for order flow) raise vulnerabilities. ### Key quantitative references from Executive Summary - 73 percent (U.S. funding share for nonfinancial firms). - USD466.5 trillion (interest rate derivatives notional, second half of 2020). - USD22.94 trillion (U.S. GDP). - USD16.86 trillion (China GDP). *Executive Summary — Strengthening Capital Markets Regulation—National Progress and Gaps (IMF Departmental Paper, FSAP-based review, assessments during 2015–20)* ### Box 1 — FSAP approach and assessment sample - FSAP evolution: - Established after the 1990s Asian crisis as a joint IMF–World Bank program. - Post-GFC reorientation emphasized three pillars: risks and vulnerabilities; regulatory framework and supervisory oversight; availability of safety nets to manage/resolve crises. - For securities and derivatives markets, regulatory framework and oversight pillar areas identified in collaboration with IOSCO. - FSAP sample composition and modalities: - 19-country sample: three detailed IOSCO implementation assessments; focused technical notes on securities/derivatives in 16 countries; cyber/fintech cross-cutting themes in two. - FMI assessments in 17 jurisdictions: four detailed PFMI observance assessments; 13 focused technical notes. - Timing/context examples: US Dodd-Frank rule development during 2015 FSAP; EU implementation delays affected regulation of trading venues and intermediaries; 2017 China FSAP found need for enhanced OTC derivatives regulation. - Risk priorities addressed: - Liquidity mismatches in nonbank sector and implications for securities and money market resilience highlighted starting with the 2015 US FSAP and in subsequent FSAPs (2018 euro area, 2020 Denmark and US, 2016 and 2022 UK). - Country-tailored assessments: asset management interconnectedness (Ireland, Luxembourg, US); cross-border supervision (Sweden); LIBOR cessation (US 2020 FSAP). - Institutional findings: - Independence concerns: appointment methods, finance ministry representation, powers to review supervisory decisions can undermine independence. - Supervisory resources: widened mandates post-GFC without commensurate funding; need for specialist expertise in cyber, operational resilience, climate/ESG, fintech/DeFi. - Positive: enhanced international cooperation within unions and across countries. ### Box 1 — Asset management and intermediary findings (selected) - Asset management perimeter and data: - Perimeter often too narrow; examples include discretionary portfolio management excluded (about half AUM in one jurisdiction) and only retail-marketed funds in perimeter in another. - Inconsistent reporting across fund types leads to data gaps. - Liquidity management tools: - Many jurisdictions restrict permissible liquidity tools (e.g., swing pricing prohibited in some). - In some jurisdictions the only enforceable tool is suspension of redemptions. - Adaptation toward a mix of liquidity tools is beneficial. - Interconnectedness and stress testing: - Investment funds interconnected with banks and other funds; bond and emerging-market fund stress could transmit via credit lines from banks. - FSAP stress tests indicate some bond funds could struggle to meet redemptions under stress. - CNAV MMFs: - Continuing CNAV use poses challenges; regulator-led stress testing recommended. - Recent FSAP stress tests did not indicate a significant immediate risk of “breaking the buck,” but findings are scenario-dependent and periodic testing is needed. ### Box 1 — Intermediaries and supervision - Prudential oversight: - Improvements in oversight of significant intermediaries; need for clarity where intermediaries belong to banking groups. - Some countries strengthened broker-dealer capital and early-warning measures. - Need to enhance funding for safety nets and investor compensation schemes. - Supervisory coverage: - Supervisory intensity insufficient for some intermediary categories. - Trade-offs observed where increased prudential scrutiny in one area reduced oversight in others. - Supervisory populations span systemic entities and many small owner-operated entities that pose conduct risks. *Source: Box 1. Analysis and Assessment of Securities Markets in the FSAP, scmrnpgea - Box 1. Analysis and Assessment of Securities Markets in the FSAP* ### 5. Regulation and Supervision of Financial Market Infrastructures — A. Context - Post-GFC focus on failures in OTC derivatives market prompted CPSS-IOSCO standards. - Key questions examined: - Does scope of FMI supervision meet post-GFC expectations? - Are trading, clearing, and settlement infrastructures resilient to operational challenges and extreme market conditions, including CCP failure of major participants? - Recognition of operational resilience increased toward end of assessment period in larger markets. ### 5. Regulation and Supervision of Financial Market Infrastructures — B. Central Counterparties (CCPs) - Central clearing growth heightens need for robust CCP regulation, supervision, oversight. - Priorities: - Recovery and resolution arrangements, crisis management planning, communication. - Strengthen domestic and cross-border cooperation frameworks where multiple authorities supervise CCPs or where foreign infrastructures are systemically important domestically. - Implementation status and areas for improvement: - Progress on PFMI adoption, but many jurisdictions need to improve CCP robustness. - Stress testing: methodologies should include sufficiently extreme scenarios; interconnectedness analysis requires expanded coverage and better quality data. - Interdependency analysis: high concentration and cross-border clearing raise interdependency and operational-continuity concerns (custodial reliance, shared clearing-member participation). - Margin models: need to address procyclicality holistically; conduct regular sensitivity analyses; require authority validation of models. - Risk frameworks should consider credit, liquidity, reputation, and competition risk. - Crisis management improvements: form crisis management groups; create tools backed by binding rules/agreement; regularly test plans. - Central bank services: - Increasing CCP access to central bank services is a priority in several jurisdictions. - Example recommendations: Sweden Riksbank consider collateralized overnight liquidity access; euro area recommended Eurosystem harmonize CCP access to deposit accounts and liquidity to create level playing field regardless of banking license status. ### 5. Regulation and Supervision of Financial Market Infrastructures — C. Trading Venues - Reforms implemented to enhance secondary market oversight; gaps remain across asset classes and jurisdictions. - Examples: - US CFTC moved to final registration for “swap execution facilities”; SEC had yet to finalize a securities-based swaps regime by 2020. - SEC requires enhanced disclosures of equity ATS models and proposed extending ATS regulation to systems trading government debt, repurchase and reverse repurchase agreements. - China FSAP found need to develop regulatory regime for non-exchange equity trading venues. - EU expanded regulatory scope to more bond and derivative trading venues. - Ongoing importance: ensure coverage across equity, bond, and derivative venues as market structures and trading practices evolve. ### 5. Regulation and Supervision of Financial Market Infrastructures — D. Operational Resilience - Authorities recognize operational resilience importance; fewer have systematic programs. - Technology reliance at trading venues and FMIs increases outage risk and recovery needs. - Supervisory suggestions: - Dedicated IT resilience supervisory programs are beneficial. - Focus on stress points such as opening/closing auctions where absence of prices affects valuations. - Conduct crisis simulations for simultaneous disruptive events across key venues to understand dependencies and reduce impacts. *Source: scmrnpgea - 5. Regulation and Supervision of Financial Market Infrastructures* ### 6. Emerging Issues — A. Fintech and Cyber-Resilience - Fintech developments: alternative capital-raising platforms (crowdfunding); regulator goal to balance facilitation and investor protection. - Crypto assets: - Challenge: determine applicability of existing regulation; custody rules where regulated firms hold private keys; settlement finality where “miners” finalize transactions. - Cross-border crypto service providers complicate supervision/enforcement. - Some jurisdictions clarify that crypto services with security-like characteristics fall under securities/derivatives laws. - FATF standards prompted exploration of regimes for actors/assets with unclear regulatory status. - DLT and DeFi: - DLT relevant to FMIs, payments, clearing and settlement via permissioned platforms; adoption limited but offers digitization benefits. - DeFi and smart contracts challenge accountability and resolvability, may be hard to link to a jurisdiction. - IMF analysis: collateral “locked” in DeFi platforms rose to USD100 billion as of September 2021. - Cyber-resilience: - Enhanced focus needed; some jurisdictions integrate oversight into national cyber efforts. - Supervisory authorities may lack in-house expertise and sometimes over-rely on internal IT staff or ad hoc external expertise. - Supervisory responses may be insufficient relative to potential systemic impact of successful attacks. ### 6. Emerging Issues — B. Benchmark Transition - Vulnerabilities and history: - Some benchmarks (e.g., LIBOR) relied on judgement-based bank submissions when underlying transactions were scarce; manipulation and fragility were revealed in 2012–16 enforcement actions. - Regulatory actions and international coordination: - Jurisdictions authorized benchmark administrators, made some benchmarks “critical,” and empowered supervisors to compel production, manage cessation, and compel submissions. - UK announced in 2017 it did not plan to require panel banks to continue LIBOR submissions beyond end of 2021; end of 2021 target for transition set internationally. - Alternative reference rates based on compounded risk-free or near risk-free overnight rates identified; they do not replicate forward-looking term structures. - Transition timeline and status: - Most LIBOR settings ceased at the end of 2021; some US dollar settings continued until June 30, 2023. - FSB noted in July 2021 growth in US dollar LIBOR-based derivatives and securitization; emphasized accelerating transition and addressing “tough legacy” contracts. - By April 2022, FSB indicated majority of US dollar OTC derivatives and capital market products were now referencing SOFR. - Continued issuance referencing US dollar LIBOR through 2021 implied further effort needed for orderly transition when US dollar LIBOR ends in 2023. ### 6. Emerging Issues — C. Climate Transition and “Green” Finance - Growing importance: climate risk will be a key issue for securities and derivatives markets; need coherent international classification, disclosure, and “green” investment standards. - Disclosure, accounting, and audit challenges: - Supervisors expected to ensure institutions address climate risks and avoid “greenwashing” despite imperfect data. - Disclosure requirements must capture material climate risks for initial offers and ongoing reporting. - Assets may become stranded or lose significant value due to climate policy or impacts. - Difficulty in verifying accuracy of climate-related disclosures; audits and audit standards may need reconsideration for climate dimensions. - Asset manager and valuation implications: - Portfolios must remain consistent with mandates once climate factors incorporated; valuations may be materially affected (e.g., fossil-fuel-related assets). - Potential shocks to fund values could affect asset managers, clients, and banks providing credit lines. - Supervisory reflection needed on scope and methodology of stress-testing to cover climate-related scenarios. - Futures, derivatives, operational resilience, and perimeter: - New derivatives (water, climate variables, emission allowances) may require perimeter reviews. - Climate shocks could trigger extreme market movements, testing operational resilience. - Green finance and greenwashing: - Investor demand is rising; risk of greenwashing is high. - Lack of consistent determination of “green” activities, lack of reliable verification, and insufficient disclosures risk mispricing and potential large-scale investment write-downs. - Supervisory focus may need to extend beyond labelled “green” issuances to broader climate-related characteristics. ### Box 2 — Work to Date and Planned Future Approach (selected) - Climate-related disclosure, accounting, auditing, and standards: - Jurisdictions must decide how to give effect to evolving international climate disclosure standards and ensure financial statements reflect climate risks. - Efforts under the International Sustainability Standards Board aim to bring consistency to standards. - Adoption to date largely voluntary; some jurisdictions make use compulsory for some issuers. - Compulsion can enhance coverage and raise standards but may create distortions if limited to publicly owned entities. - Verification of disclosures is difficult given forward-looking uncertainty and lack of data. - Fragmentation risk: alignment or interoperability of national approaches is vital. - Asset managers, valuation, stress testing, supervisory perimeter: - Challenges ensuring portfolio mandate consistency and realistic valuations when climate factors are considered. - Potential for shocks to funds with spillovers to banks via credit lines. - Jurisdictions should consider enlarging stress-testing practices to adequately cover climate scenarios. - Debt markets, March 2020 stress episode, and policy responses: - Market stress in March 2020 was stabilized through swift policy response, including central bank purchases of risk assets in some advanced economies. - Central bank measures increased G7 central bank assets by USD7 trillion in the eight months from February 2020, compared to about USD3 trillion in the year following Lehman Brothers in 2008. - Interventions pose potential moral hazard if market participants expect central bank intervention and do not internalize liquidity risks. - Recommended focus areas by international standard setters: - Continuous risk and vulnerability assessments, including stress testing of MMFs and bond funds (particularly high yield and emerging market funds). - Consider adequacy of liquidity management tools for open-ended funds. - Analyze interconnectedness between NBFIs and banks. - Review CCP margin models and anti-procyclicality measures. - Assess operational resilience of infrastructure and liquidity providers. - Further market-structure and regulatory considerations: - Tailor regulatory frameworks to debt market specificities (liquidity profiles, electronic trading). - Review transparency, predictability, and anti-procyclicality of CCP margin requirements. - Assess appropriateness of margin models for non-centrally-cleared transactions. - Analyze interactions between margin calls and MMF redemptions; effectiveness of settlement mechanics and settlement-fail management. - Review interactions between spot and derivatives markets to identify avoidable dislocations. - Business model changes and supervisory resourcing: - Business model shifts (commission-free dealing, payment for order flow) can affect margining, settlement times, and market behavior. - High-profile corporate frauds/failures raise audit robustness concerns, extending to nonfinancial climate-related disclosures. - Decline in issuer participation in public markets could concentrate equity trading. - Urgent need to address supervisory independence and resourcing; requirement for SupTech, expertise in technology, climate impacts, and international cooperation. ### Annex and sample notes - Paper based on securities and derivatives FSAP assessments 2015–2020. - Sample includes all “S29” countries with mandatory FSAP participation since 2013; 16 covered individually, four (Austria, Belgium, Italy, Spain) covered by eurozone assessment. - Sample also includes New Zealand, South Africa, and Thailand added to revised “S47” list in May 2021. *IMF Departmental Papers • Strengthening Capital Markets Regulation—National Progress and Gaps* _Source: scmrnpgea (Strengthening Capital Markets Regulation—National Progress and Gaps, IMF Departmental Paper, FSAP-based review)_ ### Executive Summary ...............................................................................................vii ### Executive Summary ### Capital markets' role and post-GFC reform context - Capital markets support economic activity and hedging; their resilience is vital to financial stability. - Nonbank financial intermediation (NBFI) grew significantly and rapidly over the last two decades, increasing systemic relevance. - Post-GFC reforms targeted: - OTC derivatives: incentivize central clearing through CCPs and higher capital where not centrally cleared. - Liquidity in MMFs and other investment funds. - Regulation of FMIs, including CCPs. - Historical episodes cited as evidence of market transmission risk: Long-Term Capital Management recapitalization in 1998 and Lehman Brothers failure in 2008 with significant OTC positions; the Reserve Primary money market fund “breaking the buck.” - The largest capital market (United States) accounts for 73 percent of that country’s funding of nonfinancial firms. - In the second half of 2020, the notional amount of interest rate derivatives contracts outstanding was USD466.5 trillion. - To give an indication of scale, recent IMF data indicated U.S. GDP at USD22.94 trillion and China’s GDP at USD16.86 trillion. - LIBOR cessation and other benchmark transitions pose tests of international collaboration and regulated controlled cessation of systemically important benchmarks. ### Basis and scope of the analysis - Analysis draws on common themes from FSAP assessments conducted during 2015–20 covering risks, vulnerabilities, oversight, and crisis management of securities and derivatives markets, infrastructures, intermediaries, and participants. - The FSAP’s evolving focus has emphasized financial stability, including the financial safety net, CCP resilience, asset management vulnerabilities (MMFs and bond funds), and the regulatory coverage of trading venues beyond traditional exchanges. - The jurisdictions assessed form a representative sample of the securities and derivatives sector; findings are extrapolated accordingly. ### Progress since the GFC and remaining gaps - Significant progress achieved on many post-GFC reform areas, but additional work is required on reducing procyclicality and strengthening safety nets and crisis management—urgency amplified by rapid NBFI growth. - Asset management: - Need to close regulatory gaps in some countries to size financial stability risks. - Securities regulators would benefit from access to a wider range of regulatory tools to prevent and manage systemic liquidity shocks. - Enhanced stress testing by industry and supervisors is commonly needed to identify fund vulnerabilities in a timely manner. - Market intermediaries: - Progress in strengthening regulatory and crisis management frameworks for significant dealers via enhanced capital requirements and safety nets. - Greater clarity on consistency between banking and securities arrangements would enhance resilience. - CCPs and FMIs: - Margin models may require further calibration to avoid exacerbating procyclicality during stress. - Direct access for CCPs to central bank liquidity merits further examination; such consideration could extend to NBFI more broadly. - Greater international coordination on CCP crisis management is needed given considerable cross-border clearing. - Market infrastructure and trading venues: - Work continues to ensure regulatory scope covers equity, debt, and derivatives markets beyond traditional exchanges. - Not all potentially systemic infrastructure (for example, benchmarks) may yet have been identified and regulated. ### Emerging issues highlighted - Fintech and cyber-resilience: - Many countries have taken steps to embed cyber resilience in core supervision and to reduce and manage trading disruption risk. - Regulators face a range of innovations: crowdfunding, crypto assets, DLT applications (including clearing and settlement), and DeFi (decentralized finance). - Supervision of DeFi poses growing challenges, especially if self-executing “smart contracts” become widespread. - Benchmark transition: - LIBOR cessation provides a practical test of regulatory regimes’ ability to anticipate and avert market disruption and to guide controlled cessation practices. - Climate transition and “green” finance: - Focus on climate change will increase given risks to financial stability and public policy objectives if climate impacts are not appropriately reflected in financial statements, valuations, and issuer disclosures relied upon by investors. - Bond markets, accounting, and changing business models: - Instability in key bond markets, defaults by potentially systemically significant issuers, and large outflows from emerging market bond funds during the pandemic prompt reflection on vulnerabilities and policy responses. - High-profile corporate failures and fraud cases raise questions about audit robustness and possible need to refocus on international accounting and auditing standards. - Shifts in retail investor behavior, zero-commission business models, and “payment for order flow” raise potential vulnerabilities if commission-free models become more broadly adopted. ### Regulatory perimeter, data, and supervisory capacity - Repeated FSAP finding: supervisory authorities are often insufficiently resourced—even in large, sophisticated markets—despite post-GFC expansion of regulatory scope and supervisory expectations. - Key implications: - Regulators require a wider range of specialist expertise and upgraded supervisory techniques and technology to keep pace with increasingly technology-enabled markets. - Lack of operational independence in some jurisdictions compounds resource constraints and limits effective supervision and response. - Perimeter issues warrant ongoing assessment: - Ensure coverage of the necessary range of actors, activities, and instruments, including exchange-traded and OTC derivatives, alternative trading venues, asset managers, and systemically important benchmarks. - Coverage of crypto assets is likely to become relevant for more jurisdictions as DLT and DeFi applications evolve. ### Institutional framework and supervisory priorities - Continued priority areas identified in FSAPs: - Enhance independence, resources, and capabilities of securities and derivatives regulators. - Improve data completeness and robustness to reduce impediments to risk identification and leverage analysis. - Strengthen liquidity management tools, stress-testing of money market and bond funds, and interconnectedness analysis. - Implement and reinforce central clearing where mandated; increase CCP resilience through robust margining and resolution arrangements. - Monitor adoption of new technologies in FMIs and address operational resilience of trading venues. _Executive Summary — Strengthening Capital Markets Regulation—National Progress and Gaps (IMF Departmental Paper, FSAP-based review, assessments during 2015–20)_ ### Box 1. Analysis and Assessment of Securities Markets in the FSAP ### Box 1. Analysis and Assessment of Securities Markets in the FSAP ### FSAP approach and evolution - FSAP established in the wake of the 1990s Asian financial crisis as a joint IMF–World Bank program providing in-depth assessments of financial stability and development. - Post-GFC reorientation emphasized three pillars: risks and vulnerabilities; the regulatory framework and supervisory oversight; the availability of safety nets to manage and resolve financial crises. - For securities and derivatives markets, specific areas of focus for the regulatory framework and oversight pillar were identified in collaboration with IOSCO. - Shift from detailed assessments of compliance with international regulatory standards to more targeted reviews tailored to countries’ markets and risk profiles. - Sample of FSAPs in 19 countries contains: - only three detailed assessments of implementation of the IOSCO Objectives and Principles of Securities Regulation (one a follow-up to an earlier, detailed assessment); - focused technical notes on securities and derivatives in 16 countries; - relevant cross-cutting themes (cyber and fintech) in two other countries (Annex 1). - Dedicated assessments of FMIs were carried out in 17 jurisdictions: - four took the form of detailed assessments of observance of the CPMI-IOSCO Principles of Financial Market Infrastructures; - the remaining 13 were focused technical notes. - FSAP timing and context examples: - In the United States, the Dodd-Frank Act provided a framework for reform; detailed rules were under development by the SEC and CFTC at the time of the 2015 FSAP, with some rules yet to be finalized at the time of the 2020 FSAP. - In the EU, legislation enacted to regulate CCPs and CSDs; implementation deadlines were missed in several jurisdictions affecting regulation of trading venues, intermediaries, hedge fund managers, and collective investment schemes. - The 2017 China FSAP found enhanced regulation of OTC derivatives markets was needed. - The risk-focused, stability-oriented approach allowed tailored assessments, accommodated pre-existing and emerging issues, and connected risks/vulnerabilities analysis to regulatory and supervisory framework assessments. - Asset management FSAP findings informed a separate MCM paper on risks and implications for policy. ### Risk priorities addressed across FSAPs - Liquidity mismatches in the nonbank sector and implications for securities and money market resilience were a focus starting with: - the 2015 US FSAP, and subsequently in the 2018 euro area, 2020 Denmark and the United States, and 2016 and 2022 UK FSAPs. - Specific country-tailored assessments included: - asset management interconnectedness assessments in Ireland, Luxembourg, and the United States; - cross-border supervision focus in Sweden due to Nordic interconnectedness; - exploration of LIBOR cessation impact in the 2020 US FSAP. ### Institutional framework — findings and concerns - Institutional arrangements remain a core area of focus for regulators; international standards set benchmarks for regulatory and supervisory institutional arrangements. - Independence of supervisory authorities is foundational but challenges persist: - methods of appointment or political involvement can call independence and impartiality into question. - finance ministries represented on boards, power to review supervisory decisions, or final decision-making on licensing can undermine delegated supervisory authority. - self-regulatory organizations (SROs) may lack sufficient oversight; market participants can be over-represented on SRO decision-making or enforcement bodies. - Adequacy of supervisory resources is a significant concern, including in jurisdictions with the world’s largest and most sophisticated securities and derivatives markets. - Some authorities have broadened mandates post-GFC without commensurate funding, producing “sticking plaster” responses and gaps across areas. - Increased need for specialized expertise (cyber, operational resilience) compounds resource constraints. - Emergence of climate-related and other ESG issues, fintech (including DeFi), and other developments will increase demand for specialist expertise. - Emphasis should be on adequacy of resourcing for both human expertise and supervisory technology (SupTech); authorities’ own technological resilience is an emerging risk. - Positive development: significant effort to enhance international cooperation both within unions (e.g., EU) and across countries, including alignment between United States and EU on post-GFC reforms and LIBOR cessation preparations. ### Asset management regulation and supervision — findings - Financial stability risks from asset management require regulatory frameworks with sufficiently broad scope; regulatory perimeter can be defined too narrowly. - Example country findings: in one case all discretionary portfolio management (equivalent to about half the assets under management in the jurisdiction) was outside the perimeter at the time of the FSAP assessment; in another, only funds marketed to retail investors were within the perimeter. - In jurisdictions with broader perimeters, inconsistent reporting requirements across fund types led to data gaps. - Securities regulators have improved data granularity and quality, but limitations remain. - Liquidity risk prevention and management measures are often insufficient, even in jurisdictions with mature frameworks. - Many jurisdictions explicitly provide for a very narrow range of liquidity management tools. - Some countries explicitly prohibit potentially useful tools such as swing pricing. - In jurisdictions where tools are tacitly permitted, authorities may lack power to require their inclusion in fund rules or implementation in extreme circumstances. - In some cases, the only enforceable tool is suspension of redemptions. - Benefits exist from adapting regimes to allow a mix of liquidity management tools. - Interconnectedness and contagion risks: - Investment funds are typically highly interconnected with each other and/or with other financial institutions, increasing potential for transmission of stress. - Stress in corporate bond funds and emerging market funds could transmit within and beyond asset management. - Stress testing of bond funds in FSAP contexts suggests some funds would experience difficulties meeting redemptions under stress scenarios and that policy measures to prevent and manage redemption shocks would be needed, with potential for contagion where funds draw down credit lines from banks. - CNAV MMF challenges: - Continuing use of the Constant Net Asset Value (CNAV) valuation methodology in MMFs poses challenges. - Securities regulators overseeing significant MMF sectors can take further steps, including regulator-led stress testing of the likelihood and impact of CNAV MMFs “breaking the buck” in stress scenarios. - Stress tests carried out for recent FSAPs in particular scenarios and jurisdictions did not indicate a significant risk of funds “breaking the buck” as happened in 2008, but this finding is scenario-dependent and periodic stress testing will be needed. - Efforts to reduce the likelihood of destabilizing redemptions, such as encouraging an end to prime MMFs’ use of CNAV pricing, should continue. ### Regulation and supervision of market intermediaries — findings and gaps - Key goal: avoid threats to financial stability from prudential failure of a significant intermediary or widespread misconduct affecting investor confidence. - Prudential oversight and safety nets: - Prudential oversight of significant intermediaries has improved and functioning of safety nets clarified, but further action needed to ensure coordinated response where intermediaries belong to banking groups. - Some countries have enhanced early warning measures and strengthened capital requirements for broker-dealers. - Scope remains to enhance safety nets by increasing funding and strengthening investor compensation schemes. - Greater clarity is needed on interaction between deposit guarantee schemes and investor compensation schemes when potential claims arise on both in relation to failure of a banking group, and on coordination arrangements. - Banking and securities supervisors do not always share a common understanding of prudential treatment of bank-owned intermediaries or how failure would be managed—particularly important where regulatory responsibilities are split across authorities. - Supervisory coverage and resource allocation: - Challenge in maintaining sufficient coverage across diverse intermediary business models and entity scales relative to multiple regulatory objectives. - Evidence that supervisory intensity is insufficient for one or more intermediary categories in many jurisdictions. - Increasing prudential scrutiny in some areas has sometimes been achieved at the expense of reduced oversight in other important areas. - Supervisory populations often span domestically systemically important entities and many small owner-operated entities that may pose significant conduct risks requiring supervisory resources even if their financial stability impact is small. *Source: Box 1. Analysis and Assessment of Securities Markets in the FSAP, scmrnpgea - Box 1. Analysis and Assessment of Securities Markets in the FSAP* ### 5. Regulation and Supervision of ### 5. Regulation and Supervision of Financial Market Infrastructures ### A. Context - Post-GFC concern about failure of a significant counterparty in the OTC derivatives market focused regulatory consideration on market intermediaries; CPSS-IOSCO developed international standards to address relevant risks (24). - Focus included arrangements for handling failure of a significant dealer and triggers for such failure, including prudential failure and conduct events causing widespread loss of investor confidence. - CCPs are now covered by enhanced regulatory oversight; certain OTC derivatives contracts are subject to mandatory clearing, reinforced by incentives to clear centrally in the capital regime for banks (25). - Regimes aim for CCPs to be able to withstand shocks, including the failure of one or more major participants. - Two key challenges assessed: - Whether the scope of FMI supervision meets post-GFC expectations. - Whether trading, clearing, and settlement infrastructure is resilient to operational challenges and extreme market conditions, including CCP failure of major participants. - Key reforms to regulatory oversight took effect during the period, though detailed implementation remains ongoing in many jurisdictions. - Growing recognition of operational resilience importance led to focus in some FSAPs in larger markets toward the end of the period. ### B. Central Counterparties - Central clearing activity growth heightens need for sound regulation, supervision, and oversight of CCPs to ensure financial stability. - Priorities: recovery and resolution arrangements for CCPs, crisis management planning, and communication. - Strengthening cooperation frameworks is recommended: - Domestically, where multiple authorities are involved in supervision/oversight of CCPs. - Across jurisdictions, especially where a foreign infrastructure provides clearing services to a degree rendering it systemically important. - Progress has been made in adopting and adhering to PFMI standards, but many jurisdictions still need to improve CCP robustness. - Stress testing and data considerations: - Stress testing methodologies should include sufficiently extreme market scenarios. - Financial system interconnectedness should be adequately analyzed; may require expanding coverage and quality of available data. - Importance of analyzing interdependencies to assess CCP resilience, including risk management robustness and adequacy of recovery and resolution planning. - High concentration and cross-border nature of central clearing increase relevance of interdependencies due to shared clearing member participation across CCPs and reliance on a small number of financial institutions for critical services (for example, custodial). - These interdependencies should inform assessments of operational risk and continuity of services in crises (26). - Areas for improvement in CCP risk management frameworks: - Margin models should adequately and holistically address procyclicality concerns to avoid exacerbating financial strain for clearing members and their clients during stress. - Regular sensitivity analyses of models and authority validation assessments are needed to ensure model robustness. - Risk frameworks should consider a wide range of risks beyond credit and liquidity, including reputation and competition risk. - Stress testing should be integral and incorporate sufficiently extreme scenarios (27). - Crisis management and recovery/resolution planning improvements: - Formation of crisis management groups for coordination across authorities within and across jurisdictions. - Creation of tools supported by binding rules/regulations or backed by formal agreements. - Regular testing of plans/processes and proper consideration of interdependencies to ensure continuity of critical services. - Increasing CCP access to central bank services is a priority in several jurisdictions: - Example: Sweden FSAP recommendation for the Riksbank to consider offering FMIs central bank access to collateralized overnight liquidity, particularly for CCPs. - Euro area assessment recommended the Eurosystem harmonize policy on CCP access to central bank deposit accounts and liquidity facilities to allow a level playing field regardless of whether a CCP has a banking license. ### C. Trading Venues - Many countries implemented reforms to enhance secondary market oversight and expanded forms of trading venues across asset classes, but gaps and challenges remain. - Examples of jurisdictional developments and gaps: - By the 2020 FSAP, the US Commodity Futures Trading Commission moved to a final registration regime for “swap execution facilities,” while the US Securities and Exchange Commission had yet to put in place a regime for securities-based swaps. - The SEC requires enhanced disclosures of equity alternative trading systems (ATS) operating models and has very recently proposed extending ATS regulation scope to include systems trading government debt, repurchase agreements, and reverse repurchase agreements (28). - China FSAP found a need to develop a regulatory regime for non-exchange equity trading venues. - In the EU, a wider range of bond and derivative trading venues now fall within regulatory scope. - Across several jurisdictions, frameworks are more robust against potential equity market trading risks, including algorithmic trading and practices, and requirements govern suspension/resumption of trading during unusual volatility or extreme market conditions. - Ongoing importance: - Ensure appropriate coverage of venues across equity, bond, and derivative markets, taking account of market characteristics as markets and trading practices evolve. ### D. Operational Resilience - Many authorities recognize operational resilience importance, but fewer have implemented a systematic response; challenges remain in prevention and understanding/mitigation of infrastructure outage impacts (29). - Heavy reliance on technology by trading venues and other FMIs increases need to avoid operational outages and to manage impact and ensure orderly recovery when incidents occur. - Dedicated IT resilience supervisory programs in several jurisdictions are beneficial despite differing sophistication and intensity (30). - Operational resilience can also be addressed as a subset of business continuity or crisis management contingency planning. - Changing trading patterns concentrate disruption risk at specific times of day, particularly opening and closing auctions: - Absence of opening or closing prices can affect funds and derivatives instruments that depend on them for valuations; this issue is likely to become more relevant in more markets. - Recommended supervisory focus and preparedness: - Ensure operational resilience supervision pays attention to potential stress points (e.g., opening/closing auctions). - Authorities and FMIs should understand wider implications of operational outages and methods to reduce or manage them. - Consider crisis simulation exercises for plausible events that could cause significant disruption, such as simultaneous failure to close in multiple key venues, to understand full range of dependencies and identify/implement means to reduce impact. *Source: scmrnpgea - 5. Regulation and Supervision of Financial Market Infrastructures* ### 6. Emerging Issues ### 6. Emerging Issues ### A. Fintech and Cyber-Resilience - Fintech developments in securities markets have focused on alternative platforms for start-up capital raising and intermediation through crowdfunding platforms. - Authorities aim to balance facilitating capital-raising by companies not yet large enough to list and protecting investors given elevated potential for capital loss in such investments. - Fintech activities in securities markets have, until recently, rarely been of a scale or nature to pose material financial stability risks; regular horizon scanning and assessment of investor protection implications of new capital-raising strategies remain paramount. - Crypto assets (also referred to as “virtual assets”): - Crypto assets play an increasingly prominent role in the financial sector. - A first challenge is determining the extent to which existing regulations apply and whether adjustments to perimeter or detailed requirements are needed. - In a number of jurisdictions there is clarity that at least some services in relation to some crypto assets that have the characteristics of securities are covered by existing laws relating to securities and/or derivatives. - Practical challenges include applying custody or safeguarding rules where regulated firms hold private keys, and adapting settlement finality provisions to reflect the role played by “miners” in finalizing transactions. - Cross-border operation of many crypto service providers complicates supervision and enforcement. - Some jurisdictions are exploring regimes for actors or assets whose status under existing regulations is less clear, prompted in part by Financial Action Task Force standards in relation to anti-money laundering requirements for virtual asset service providers. - This issue is likely to remain an area of focus as crypto assets continue to move into the financial mainstream. - Distributed Ledger Technology (DLT) and Decentralized Finance (DeFi): - DLT is particularly relevant to FMIs and to payments and securities clearing and settlement via permissioned platforms. - Authorities and FMI operators are evaluating whether existing regulatory frameworks ensure sufficient supervision over FMIs that employ novel systems; international standards are used where possible to evaluate risks and benefits with an aim to ensure PFMI compliance. - Authorities seek standardization in DLT to avoid operational fragmentation and lack of interoperability. - Adoption has been limited so far, but DLT can potentially provide market efficiencies through digitization and automation. - DeFi applications, including self-executing “smart contracts,” may challenge supervisors in determining accountability and ensuring resolvability where a responsible party may be difficult to identify and subject to limited regulatory grip. - Smart contracts and other DeFi applications may not be easy to link to a particular jurisdiction and may operate across jurisdictional boundaries, making international consensus and collaboration on regulation and supervision crucial and challenging. - IMF analysis suggests that the amount of collateral “locked” in DeFi platforms has risen significantly, reaching USD100 billion as of September 2021. - Cyber-resilience and operational resilience: - Cyber-resilience deserves enhanced focus; broader operational resilience merits continued attention. - Authorities in jurisdictions with the largest and most developed markets are generally acutely aware of the need for cyber-resilience and often integrate oversight into wider national cyber efforts. - Some jurisdictions implement structured supervisory programs treating cyber-security as part of wider operational resilience. - Supervisory authorities may lack in-house expertise and sometimes over-rely on internal IT staff or ad hoc external expertise. - In some instances supervisory responses do not seem commensurate with the threat or potential impact on the financial system if an attack on market infrastructure were successful. - Operational resilience considerations include effective management of technological change, recovery from incidents driven by causes other than cyber-attacks, and other external factors such as changes in operating conditions triggered by the global pandemic. ### B. Benchmark Transition - Background and vulnerabilities: - Interest rate benchmarks like LIBOR were widely referenced in interest rate swaps and other contracts. - For some benchmarks with insufficient underlying transactions, participant banks’ submissions used to calculate the benchmark became increasingly judgement-based estimates rather than transaction data, making benchmarks susceptible to manipulation. - In 2012–16 authorities in several jurisdictions brought enforcement actions against financial institutions for such manipulation. - The discovery of historic manipulation and fragility of underlying volumes highlighted vulnerabilities of estimate-based benchmarks and reduced willingness of financial institutions to provide estimate-based submissions. - Regulatory responses and market actions: - Some jurisdictions introduced requirements for benchmark administrators to be authorized and to implement procedures to avoid or manage conflicts of interest, and allowed certain benchmarks to be deemed “critical.” - Regulations gave supervisory authorities powers to compel administrators to continue producing or to ensure orderly cessation or transition of critical benchmarks and to compel regulated financial institutions to make submissions for a specified time. - The United Kingdom introduced powers for the regulator to require changes to critical benchmarks; the United States and EU introduced legislative measures (LIBOR-specific in the United States) to enable replacement rates to be specified in certain circumstances. - International efforts aimed to design and encourage an orderly transition to alternative reference rates, with the end of 2021 identified as a target date; in 2017 the UK Financial Conduct Authority announced it did not plan to require panel banks to continue submitting to the LIBOR administrator beyond the end of 2021. - Alternative reference rates were identified generally based on compounded risk-free or near risk-free rates in overnight transactions; these are grounded in transactions rather than estimates but do not replicate the forward-looking term structures available under previous reference rates. - Transition challenges and timeline: - The potential for significant market disruption from LIBOR cessation warrants consideration; benchmark transition tests regulatory and supervisory regimes’ forward-looking capacity. - The UK regulations and proactive supervisory effort supported a managed and orderly transition. - Issues during the LIBOR transition are likely pertinent in other jurisdictions relying on LIBOR or similar rates, particularly given that US dollar LIBOR is due to continue until 2023. - Preparing for cessation involved designing alternative rates, creating infrastructure to support trading in instruments referencing new rates, addressing “legacy” references to LIBOR, ensuring clearing services, and building liquidity in markets referencing new rates. - Extensive work, notably by the International Swaps and Derivatives Association, established “fall-back” arrangements for existing contracts referencing LIBOR once those rates were discontinued or declared unrepresentative. - In the United States there was a concerted policy effort to design alternatives and remove obstacles to adoption, but less focus on supervisory tools to assess and mitigate readiness risks of infrastructure providers and intermediaries. - Recent status and remaining tasks: - Most LIBOR settings ceased at the end of 2021, but significant new issuance referencing US dollar LIBOR continued through 2021 and further effort may be needed for an orderly transition when US dollar LIBOR ends in 2023. - In March 2021, UK authorities and the benchmark administrator confirmed LIBOR would end or cease to be representative in all currencies other than US dollars on December 31, 2021, but some US dollar settings would continue until June 30, 2023. - The FSB noted in July 2021 that activity in US dollar LIBOR-based derivatives had grown since 2017 and US securitization issuance remained primarily LIBOR based; it underlined the importance of accelerating transition and addressing remaining “tough legacy” contracts and indicated it would report again in mid-2022. - By April 2022 there were signs of progress, with the FSB indicating that the majority of US dollar OTC derivatives and capital market products were now referencing SOFR, the replacement reference rate. ### C. Climate Transition and “Green” Finance - Growing importance: - A key emerging issue for securities and derivatives markets will be risks from and responses to climate change and the associated development of “green” finance. - Efforts are underway to increase coherence and robustness of international standards for classification of activities, disclosure of material information related to climate change and energy and ecological transition, and classification of securities and investments as “green.” - Supervisory expectations and disclosure challenges: - Supervisors will increasingly be expected to ensure institutions address climate risks and accurately disclose their approach to climate transition policy to avoid “greenwashing,” despite imperfect data. - This will create challenges for regulatory and supervisory authorities, financial institutions, and corporate issuers amid a constant evolution in international standards. - Climate change and transition policy add extra dimensions to timely and accurate disclosure of material information by issuers; initial offers must disclose material risks and ongoing disclosure requirements supplement this. - Issuers, investors, and regulators are grappling with how climate change and energy and ecological transition should inform disclosures. - An issuer’s assets may experience a significant loss of value, or become a valueless “stranded asset,” as a result of either climate policy or climate impacts. *IMF Departmental Paper — Strengthening Capital Markets Regulation—National Progress and Gaps (chapter 6)* ### Box 2 summarizes work to date and planned future approach. ### Box 2 — Work to Date and Planned Future Approach ### Climate-related disclosure, accounting, auditing, and standards - Jurisdictions will need to determine how to give effect to evolving international climate disclosure standards, how to ensure that financial statements appropriately reflect climate risks and impacts, and that audits appropriately reflect the climate dimension. - Various initiatives have sought to codify what constitutes adequate disclosure; efforts are underway under the auspices of the newly-formed International Sustainability Standards Board to bring enhanced consistency to standards and pave the way for enhanced integration with international accounting standards. - Adoption of the existing standards has to date been largely voluntary and implementation of variable quality. - Some jurisdictions are now making the use of such disclosure frameworks compulsory for at least some categories of issuer. - Compulsion can: - enhance coverage; - potentially raise standards; and - remove some competitive distortions arising where disclosures are voluntary and made without reference to a common standard. - Risks and trade-offs of compulsion: - If limited to entities that are publicly owned, compulsion could introduce distortions in competition between publicly- and privately-owned entities and potentially incentivize private ownership structures. - Verification and assurance challenges: - Significant difficulty in verifying accuracy of disclosures related to climate-related risk and impact given uncertainty regarding effects of climate change, difficulties of providing assurances on forward-looking risks, and lack of data. - Consideration needed on whether scope of audits and audit standards are sufficient to ensure climate-related disclosures are accurate and appropriately reflected in financial statements. - Fragmentation risk: - Attention should be devoted to risks stemming from fragmentation of market practices and policy developments on climate information architecture; alignment or interoperability of national approaches is vital. ### Asset managers, valuation, stress testing, and supervisory perimeter - Asset managers including operators of collective investment schemes will face challenges in: - ensuring portfolios are consistent with mandates once climate-related factors are considered; - ensuring asset valuations are realistic once climate-related factors are considered. - Climate change and transition policy can reduce the value of certain assets (for example, those related to fossil fuel extraction) and make valuation of assets and liabilities challenging. - Risk implications: - Potential shocks to the value of funds and portfolios could impact asset managers, their clients, and potentially banks that extend credit lines to them. - Supervisory and regulatory considerations: - Jurisdictions will need to reflect on whether current regulatory and supervisory approaches address these challenges. - Consider whether scope, underlying rationale and methodology of stress-testing practices needs to be enlarged to adequately cover climate-related scenarios. ### Futures, derivatives, operational resilience, and regulatory perimeter - As existing futures and derivatives markets grow and new instruments emerge, jurisdictions may need to review the scope of their regulatory perimeter and consider whether operational resilience is sufficient to deal with extreme events. - Potential new derivatives/underlyings include futures of water, climate variables, emission allowances, or other carbon pricing mechanisms. - Need to ensure regulatory perimeter encompasses such instruments which may previously have been uncaptured where scope was limited to underlyings that were securities or other financial instruments. - Climate-related physical or policy shocks could trigger extreme market movements, testing operational resilience of infrastructure providers. - Example of extreme derivative movement not climate-driven: during the coronavirus pandemic some oil derivatives had negative prices due to storage and other capacity constraints. ### Green finance, investor demand, and greenwashing risk - Investor interest in green finance is growing and in some jurisdictions is actively encouraged to support the Paris Agreement climate goals. - Risk of greenwashing is high and could have significant consequences. - Challenges to realizing benefits: - Lack of consistent way to determine which activities, assets and products are compatible with which climate-related objectives. - Lack of reliable verification that claims are delivered in practice. - Need for appropriate disclosures to inform investor decision-making. - Potential financial stability consequence: - Scenarios where significant pension funds invest in assets that transpire not to be compatible with claimed climate objectives and consequently need to be written-down or written-off. - Supervisory implications: - Authorities will need to act before definitive international standard or full interoperability of existing standards exists. - Supervisory focus may need to extend beyond labelled “green” issuances to broader climate-related characteristics of other investments and disclosures by a broad range of issuers and market participants. - Supervising use of standards consistent with available scientific evidence is likely to require specific expertise that may not be readily available within authorities, exacerbating resourcing challenges. ### Debt markets, March 2020 stress episode, and policy responses - Market stress beginning in core funding markets in March 2020 was stabilized through a swift and significant policy response, but this involved material risk and potential for engendering moral hazard. - In emerging market economies the shock manifested as a shortage of US-dollar cash; central bank responses focused on traditional monetary policy or measures to provide dollar liquidity. - In some advanced economies (AE), central banks additionally purchased risk assets including commercial paper, asset-backed securities and corporate bonds, sometimes through purchases of high-yield bond exchange-traded funds. - Some AE central banks also: - introduced targeted liquidity facilities for specific entities such as dealers or MMFs; - changed dealer leverage rules; - allowed use of bank buffers to support lending; or - temporarily modified the leverage ratio. - To facilitate access to US dollars in cash: - Several central banks introduced or extended frequency and tenor of existing swap lines. - The Federal Reserve introduced a temporary repo facility to allow foreign monetary authorities to enter repurchase agreements directly with the Federal Reserve. - Scale of interventions and potential moral hazard concern: - These measures increased G7 central bank assets by USD7 trillion in the eight months from February 2020, compared to about USD3 trillion in the year following the collapse of Lehman Brothers in 2008. - Could potentially lead to moral hazard if market participants do not internalize liquidity risks in expectation of central bank intervention. - Resulting analysis and recommended areas of focus (from international standard setters): - Robust and continuous risks and vulnerabilities assessments, including stress testing of MMFs and bond funds (particularly high yield and emerging market funds). - Consideration of adequacy of liquidity management tools for open-ended funds. - Analysis of interconnectedness between NBFIs and banks. - Adequacy of CCP margin models, including anti-procyclicality measures. - Operational resilience of infrastructure and liquidity providers. ### Further market-structure and regulatory considerations - Tailoring regulatory frameworks to debt markets: - Consider whether regimes are well-calibrated to debt market specificities, including liquidity profiles for traditional execution channels and growing electronic trading segments. - Consider whether regimes need modulation in times of stress. - Consider how dealers and other participants account for implications of significant margin calls in stress scenarios and their liquidity preparedness. - Review adequacy of data available to regulators about the NBFI sector. - Consider review of: - Transparency, predictability and anti-procyclicality of CCP margin requirements. - Appropriateness of margin models for non-centrally-cleared transactions. - Interaction between margin calls and redemption pressures on MMFs. - Effectiveness of settlement mechanics and management of settlement fails under stressed market conditions. - Interactions between spot and futures and other derivatives markets to identify and mitigate avoidable dislocations or transmission of shocks. ### Business model changes, audits, listings, and supervisory resourcing - Business model changes can alter market participant behavior and create or expose wider vulnerabilities (for example, commission-free dealing and payment for order flow associated with “meme” stock turbulence). - Such changes can affect margining practices, settlement times and processes. - Turbulence in bond markets during the coronavirus pandemic has prompted reflection on whether additional policy measures are necessary to ensure market resilience. - High-profile corporate frauds and failures raise questions about whether audits are being conducted to sufficiently robust standards and whether enhanced oversight is required; this concern extends to audits of nonfinancial information given climate change and ESG agenda. - Decline in issuer participation in public markets: - Capital raising through public markets appears less attractive than in the past with fewer listings and more de-listings in many jurisdictions, notwithstanding increases in initial offerings in some jurisdictions and sectors in 2020–21. - Continued decline could concentrate equity trading in a few stocks at a time when valuations may be subject to change as climate change and transition become increasingly material and other significant policy changes are contemplated. - Supervisory resourcing and independence: - Urgency of addressing weaknesses in supervisory independence and resourcing is underlined. - Adequacy of resourcing and ability for supervisors to determine and obtain necessary expertise are material obstacles to effective oversight. - Problem could become more acute with drivers including: - expanding regulatory perimeter; - need to expand and upgrade SupTech to facilitate supervision of increasingly complex and automated markets; - need for broader expertise in technological innovation and resilience, climate impacts and other facets of sustainability; - continuing need for international cooperation to address financial services delivered cross-border in contexts such as virtual assets and DeFi. ### Annex and assessment sample notes - This paper is based on a sample of securities and derivatives assessments carried out in FSAPs between 2015 and 2020. - Includes all assessments relating to the “S29” countries (those which since 2013 have been subject to mandatory participation in the FSAP). - Of the S29 countries, 16 are covered individually, with a further four countries’ policies (Austria, Belgium, Italy, Spain) covered by the eurozone assessment. - The sample also includes New Zealand, South Africa, and Thailand, which were added to the revised “S47” list of jurisdictions with mandatory assessments, on a 10-year cycle, in May 2021. *IMF Departmental Papers • Strengthening Capital Markets Regulation—National Progress and Gaps* ### References ### References ### Bank for International Settlements (BIS) and CPMI/IOSCO - Bank for International Settlements (BIS) Committee on Payments and Market Infrastructures (CPMI). 2016. 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