Financial markets are experiencing increasing levels of fragmentation, which undermine the progress that has been made in re-building resilience of the global financial system since the financial crisis and result in negative consequences for economic growth and job creation. Fragmentation resulting from excessive regulatory and supervisory divergence can trap capital, liquidity, and risk in local markets, create significant financial and operational inefficiencies resulting in additional unnecessary costs to end-users, and reduce the capacity of financial firms to serve both domestic and international customers.
This IIF Report “Addressing Market Fragmentation: The Need for Enhanced Global Regulatory Cooperation”, developed by the Special Committee on Effective Regulation (SCER), seeks to define the problem of market fragmentation and identify four specific categories of market fragmentation – Local Supervisory Measures and Ring-Fencing; Diverging Standards; Extraterritoriality; and, Obstacles to Cross-Border Cooperation and Information Sharing – with 12 specific current examples. It then concludes with a number of recommendations for the regulatory and supervisory community to consider that can help prevent market fragmentation and address and mitigate its negative impacts when it occurs.
It is critical that market fragmentation be addressed to avoid these consequences and the correlated impact on the global financial system and the world economy. As jurisdictions act unilaterally without proper coordination, it also can create level playing field problems, affect comparability across jurisdictions and even risk sensitivity in regulatory frameworks.
As the post-crisis reforms continue to be implemented and reviewed for their effectiveness, this report encourages the G20 and Financial Stability Board (FSB) to make an assessment of the degree of existing market fragmentation, where it is occurring, and what the ultimate impact is on markets, respective economies, and the cross-border flow of financial services. Simultaneously, consideration of specific practical measures to prevent fragmentation (by enhancing regulatory and supervisory cooperation) and to correct its negative effects should be developed.