Capital Markets Regulation Is Stronger, but Some Gaps Still Must be Closed

IMF Blog, June 29, 2022

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Countries have made substantial progress toward implementing capital markets regulatory reform following the global financial crisis, but important gaps remain and new challenges have raised the bar.
The IMF surveyed financial sector assessment programs in several countries over the past seven years to gauge progress on reforms to market regulation and to identify further gains needed.
Financial-sector assessments continue to uncover shortcomings despite progress since the global financial crisis.

Major regulatory overhaul targeted key segments: over-the-counter derivatives, investment funds, and market infrastructure.
Reforms aimed to shore up fault lines revealed by the crisis and strengthen oversight of central counterparties (entities that function as buyer to every seller and seller to every buyer to guarantee performance of open contracts).
Nonbank financial intermediation has grown to represent almost half of the assets of the global financial system, increasing the role of nonbank firms (insurers, mutual funds, exchanges) in the global economy.

Financial-sector assessments tracked:
- risks, vulnerabilities, and arrangements for market oversight and crisis management, with a focus on safety nets for potential failures of major firms;
- resilience of central counterparties;
- vulnerability of asset managers such as money market funds and bond funds;
- adequacy of regulation for trading venues beyond traditional exchanges.
Important supervisory shortcomings persist, including:
- regulatory gaps for asset management firms in some countries;
- insufficient resources for supervisors even in some of the world’s largest and most sophisticated markets;
- limited operational independence for authorities in some jurisdictions, constraining their ability to supervise and respond to risks.
Post-crisis reforms expanded the regulatory perimeter and raised supervision expectations, but securities regulators rarely saw a commensurate increase in resources.

Cyber resilience: Trading venues are a focus for cybersecurity to boost technological and operational resilience and minimize market disruptions.
Fintech risks: Crypto assets and decentralized finance introduce novel risks alongside fintech’s promise.
Benchmark transition: Regulators must be vigilant amid the shift away from benchmarks like the London Interbank Offered Rate to new references for interest rate swaps and other key financial contracts.
Climate change: The impact of climate change must be appropriately reflected in financial statements, valuations, and issuer disclosures.
Derivatives perimeter: Policymakers need to consider more explicitly which derivatives to regulate as part of efforts to manage risks from commodity, climate, emissions, and other carbon-related instruments.

Broaden the regulatory perimeter to cover all relevant actors, activities, and instruments.
Strengthen financial safety nets and crisis-management arrangements.
Enhance early warning capabilities, including improved stress-testing tools and capacities.
For asset management specifically, broaden the range of liquidity management tools available to investment fund managers.
Ensure regulators have a wider range of specialist expertise and that supervisory techniques and technology keep pace with emerging market technologies.
Allocate commensurate resources to securities regulators to match the expanded perimeter and supervisory expectations.
Enhance operational independence of supervisory authorities where lacking to improve effectiveness.

Continued reform is necessary to lower risks, strengthen crisis-management tools, and reduce cyclical fluctuations in capital markets.
Emerging challenges (cybersecurity, fintech, benchmark transitions, climate change) and the growth of nonbank financial intermediation require regulators to evolve priorities, shore up resources, and close remaining regulatory gaps to safeguard financial stability.

Authors: Tobias Adrian, Jay Surti — June 29, 2022