FSB publishes report on market fragmentation

4 June 2019

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Ref no: 20/2019

The Financial Stability Board (FSB) today published a report on market fragmentation and identified several areas for further work to address it. The report was delivered to G20 Finance Ministers and Central Bank Governors ahead of their meetings in Fukuoka on 8-9 June.

In response to a proposal by the Japanese G20 Presidency, the FSB explored issues around market fragmentation and considered tools to address them, where appropriate. The report focuses on instances where reducing market fragmentation might have a positive impact on financial stability, or improve market efficiency without any detrimental effect on financial stability.

The report looks at some examples of financial activities where supervisory practices and regulatory policies may give rise to market fragmentation. It discusses potential trade-offs that authorities have considered between the benefits of increased cross-border activity and a need to tailor domestic regulatory frameworks to local conditions and mandates. The areas the report examines are the trading and clearing of over-the-counter (OTC) derivatives across borders; banks’ cross-border management of capital and liquidity; and the sharing of data and other information internationally.

The report lays out approaches and mechanisms that may enhance the effectiveness and efficiency of international cooperation, and help to mitigate any negative effects of market fragmentation on financial stability.

On this basis, the report identifies several areas for further work to address market fragmentation. These focus on facilitating further analysis and discussion of approaches and mechanisms for more efficient and effective cross-border cooperation amongst authorities. Such areas for further work include: exploring ways to, where justified, enhance the clarity of deference processes in derivatives markets; strengthening the understanding of approaches by supervisory and resolution authorities towards pre-positioning of capital and liquidity by international banks; considering ways to enhance supervisory communication and information sharing, including approaches and mechanisms to avoid future fragmentation; and considering whether there is evidence of market fragmentation with observed consequences for financial stability as part of the FSB’s ongoing evaluation of the effects of too-big-to-fail reforms. Section 5 of the report describes this further work in more detail.

The FSB will review progress on this further work in November 2019.

Today the International Organization for Securities Commissions (IOSCO) published a follow-up report to work undertaken in 2015 by its Task Force on Cross-Border Regulation. The report, which complements the FSB’s work, considers where and why regulatory-driven market fragmentation in wholesale securities and derivatives markets is occurring, and what action(s), if any, IOSCO and its members could pursue to minimise its adverse effects.

Notes to editors

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Vice Chairman for Supervision, US Federal Reserve; its Vice Chair is Klaas Knot, President, De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

Overnight Risk-Free Rates: A User’s Guide

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This user guide to overnight risk-free rates (RFRs) provides details on how RFRs are calculated to clarify how overnight RFRs can be used in cash products and to encourage adoption of these rates where they are appropriate.

Overnight RFRs are robust because they are anchored in active, liquid underlying markets. This contrasts with the scarcity of underlying transactions in the term interbank and wholesale unsecured funding markets from which some IBORs are constructed, a characteristic which could make them susceptible to manipulation. The FSB encourages the development and adoption of such overnight RFRs where appropriate, for example in business where term properties are not needed, or where exposure to bank credit risk is not necessary or desirable, in order to enhance financial stability.

FSB publishes user guide for overnight risk-free rates

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Ref no: 19/2019

The Financial Stability Board (FSB) has today published a user guide to overnight risk-free rates (RFRs). The guide provides an overview of RFRs, details of how they are calculated, and options on how overnight RFRs can be used in cash products. In doing so the FSB aims to encourage adoption of these rates where they are appropriate.

Interbank offered rates (IBORs), a type of interest rate benchmark, play a key role in global financial markets. The FSB started its work on reforms to IBORs in response both to cases of attempted manipulation and to the decline in liquidity in key interbank unsecured funding markets. In 2014, the FSB set out recommendations to reform major interest rate benchmarks, such as key IBORs, and has been monitoring progress on implementation since then.

As part of this work, the FSB published in July 2018 a statement on reforms to IBORs and the development of RFRs and term rates. That statement noted that, to ensure financial stability, benchmarks which are used extensively must be especially robust. Overnight RFRs have been identified in a number of currency areas because these rates are robust and are anchored in active, liquid underlying markets. This contrasts with the scarcity of underlying transactions in the term interbank and wholesale unsecured funding markets from which some IBORs are constructed, a characteristic which could make them susceptible to manipulation. The FSB continues to encourage the development and adoption of such overnight RFRs where appropriate, for example in business where term properties are not needed, or where exposure to bank credit risk is not necessary or desirable. This will enhance financial stability.

Notes to editors

In April 2019 the FSB Chair Randal K. Quarles hosted a meeting with industry participants on progress on the transition to RFRs.

In November 2018, the FSB published its most recent progress report on implementation of its recommendations to reform major interest rate benchmarks. The report sets out the progress made on the development of RFRs, and markets based on these rates, and on further reforms to IBORs.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Vice Chairman for Supervision, US Federal Reserve; its Vice Chair is Klaas Knot, President, De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

Further information on reform of financial benchmarks is available on the FSB website.

Solvent Wind-down of Derivatives and Trading Portfolios: Discussion Paper for Public Consultation

3 June 2019 | PDF full text (320 KB)

This discussion paper sets out considerations related to the solvent wind-down of the derivative portfolio activities of a G-SIB that may be relevant for authorities and firms for both recovery and resolution planning.

Many G-SIBs have large derivative and trading portfolios, including in some cases with illiquid or exotic positions. A disorderly close-out of these portfolios can potentially propagate substantial risks to financial stability. Given the global presence of some G-SIBs and the cross-border nature of many of these portfolios (including the intra-group transactions arising from firms’ booking models), such financial stability risks could spread across borders.

This discussion paper considers the capabilities G-SIBs should be able to meet to support the preparation and execution of a solvent-wind down plan, the evaluation of firm capabilities and issues that home and host supervisors need to consider.

Responses to the discussion paper should be sent to [email protected] by Friday 2 August. Consultation responses will determine whether the development of guidance would be useful. Responses to the consultation will be published on the FSB’s website unless respondents expressly request otherwise.

 

Public Disclosure of Resolution Planning and Resolvability: Discussion Paper for Public Consultation

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The FSB’s discussion paper explores how general and firm-specific disclosures on resolution planning and resolvability could be further enhanced, focusing mainly on disclosures of resolution planning for G-SIBs. However, many of the disclosure approaches discussed are also relevant for domestic systemically important banks and other firms subject to a resolution planning requirement.

Transparency with respect to resolution planning and resolvability is a necessary element of the FSB and G20 policy framework for addressing the moral hazard risk posed by systemically important financial institutions.

Responses to the discussion paper should be sent to [email protected] by Friday 2 August. Consultation responses will determine whether the development of guidance would be useful. Responses to the consultation will be published on the FSB’s website unless respondents expressly request otherwise.

 

FSB publicly consults on resolution-related disclosures and on the operationalisation of bank recovery and resolution

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Ref no: 18/2019

The Financial Stability Board (FSB) today published for public consultation two discussion papers that consider measures to improve the resolvability of global systemically important banks (G-SIBs).

Following the global financial crisis the FSB has led international efforts to address the risk that major financial institutions are too-big-to-fail. The adoption of the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions as the international standard for recovery and resolution of financial institutions and its implementation across FSB jurisdictions are core to this initiative.

Effective resolution rests on the credibility of authorities’ and firms’ resolution planning and operational readiness for handling a resolution. The FSB’s discussion papers focus on resolution-related public disclosures that strengthen the credibility of resolution planning; and on measures to ensure the effective operationalisation of a solvent-wind down of derivatives portfolios as recovery or resolution measure.

Public Disclosure of Resolution Planning and Resolvability

Transparency with respect to resolution planning and resolvability should help promote the credibility of the FSB and G20 policy framework for addressing the moral hazard risk posed by systemically important financial institutions.

The FSB’s discussion paper explores how general and firm-specific disclosures on resolution planning and resolvability could be further enhanced, focusing mainly on disclosures of resolution planning for G-SIBs. However, many of the disclosure approaches discussed are also relevant for domestic systemically important banks and other firms subject to a resolution planning requirement.

Solvent Wind-down of Derivatives and Trading Portfolios

Many G-SIBs have large derivative and trading portfolios, including in some cases with illiquid or exotic positions. A disorderly close-out of these portfolios can potentially propagate substantial risks to financial stability. Given the global presence of some G-SIBs and the cross-border nature of many of these portfolios (including the intra-group transactions arising from firms’ booking models) such financial stability risks could spread across borders.

This discussion paper sets out considerations related to the solvent wind-down of the derivative and trading book activities of a G-SIB that may be relevant for authorities and firms for both recovery and resolution planning.

Responses to the discussion papers should be sent to [email protected] by Friday 2 August. Consultation responses will be considered to determine whether the development of further guidance would be useful. Responses to the consultation will be published on the FSB’s website unless respondents expressly request otherwise.

Notes to editors

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Vice Chairman for Supervision, US Federal Reserve; its Vice Chair is Klaas Knot, President, De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

The FSB is also currently seeking feedback from stakeholders as part of its evaluation on the effects of the too-big-to-fail reforms that were agreed by the G20 in the aftermath of the global financial crisis.

FSB reports on work underway to address crypto-asset risks

31 May 2019

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Ref no: 17/2019

The Financial Stability Board (FSB) today published a report on crypto-assets, which considers work underway, regulatory approaches and potential gaps. The report is being delivered to G20 Finance Ministers and Central Bank Governors for their meeting in Fukuoka on 8-9 June.

International organisations1 are working on a number of fronts, directly addressing issues arising from crypto-assets. As described in the report, they are mainly focused on investor protection, market integrity, anti-money laundering, bank exposures and financial stability monitoring. They are monitoring and analysing developments in these markets, setting supervisory expectations for firms and clarifying how international standards apply to crypto-assets.

The report notes that gaps may arise in cases where such assets are outside the perimeter of market regulators and payment system oversight. To some extent, this may reflect the nature of crypto-assets, which may have been designed to function outside established regulatory frameworks. Gaps may also arise from the absence of international standards or recommendations.

Assessing the significance of potential gaps is challenging, given the rapidly evolving nature of the crypto-asset ecosystem and related risks. A forward-looking approach to monitoring crypto-assets can help provide a basis for identifying potential gaps and areas that should be prioritised or focused on.

The report concludes with a recommendation that the G20 keep the topic of regulatory approaches and potential gaps, including the question of whether more coordination is needed, under review.

Notes to editors

The FSB published its framework for monitoring of financial stability implications of crypto-assets in October 2018 and last reported to the G20 on the work of the international organisations in July 2018.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Vice Chairman for Supervision, US Federal Reserve; its Vice Chair is Klaas Knot, President, De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

  1. The report covers the work of the Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI), the International Organization of Securities Commissions (IOSCO), the Financial Action Task Force (FATF), the Organisation for Economic Co-operation and Development (OECD), and the FSB. [←]

Crypto-assets: Work underway, regulatory approaches and potential gaps

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This report on crypto-assets considers work underway, regulatory approaches and potential gaps. The report was delivered to G20 Finance Ministers and Central Bank Governors ahead of their meetings in Fukuoka on 8-9 June.

The report gives an update on work by the Basel Committee on Banking Supervision, Committee on Payments and Market Infrastructures, International Organization of Securities Commissions, Financial Action Task Force, Organisation for Economic Co-operation and Development and the FSB. These international organisations are working on a number of fronts, directly addressing issues arising from crypto-assets. They are mainly focused on investor protection, market integrity, anti-money laundering, bank exposures and financial stability monitoring. They are monitoring and analysing developments in these markets; setting supervisory expectations for firms; and clarifying how international standards apply to crypto-assets.

The report notes that gaps may arise in cases where such assets are outside the perimeter of market regulators and payment system oversight. To some extent, this may reflect the nature of crypto-assets, which may have been designed to function outside established regulatory frameworks. Gaps may also arise from the absence of international standards or recommendations.

Assessing the significance of potential gaps is challenging, given the rapidly evolving nature of the crypto-asset ecosystem and related risks. A forward-looking approach to monitoring crypto-assets can help provide a basis for identifying potential gaps and areas that should be prioritised or focused on.

The report concludes with the recommendation that the G20 keep the topic of regulatory approaches and potential gaps, including the question of whether more coordination is needed, under review.

FSB publishes updates on work to assess and address correspondent banking declines

29 May 2019

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Ref no: 16/2019

The Financial Stability Board (FSB) today published two reports as part of its work:

  • a progress report on the implementation of its action plan to assess and address the decline in correspondent banking relationships; and
  • a report on progress on implementing the FSB’s recommendations on remittance service providers’ access to banking services.

Addressing the decline in correspondent banking relationships: Progress report

The decline in the number of correspondent banking relationships remains a source of concern for the international community, as the number of active correspondent banks declined by 3.4% in 2018, bringing the cumulative decline since 2011 to 19.3%. Concentration increased, as fewer correspondent banks are handling payments. Access to correspondent banking relationships remains a critical issue in some regions and jurisdictions. The Committee on Payments and Market and Infrastructures (CPMI) on 27 May published the full set of data on the latest developments on the number of correspondent banking relationships.

With the international components of the FSB-coordinated action plan largely in place, attention has turned to monitoring of implementation:

  • There is growing evidence of the concrete implementation of regulatory clarifications by national authorities, following the guidance provided by the Financial Action Task Force and the Basel Committee on Banking Supervision.
  • To support domestic capacity building in jurisdictions that are home to affected respondent banks, official sector technical assistance still requires ongoing coordination. Industry initiatives to support capacity building are gaining traction, especially the additional guidance developed by the Wolfsberg Group to implement their Correspondent Banking Due Diligence Questionnaire.
  • The technical measures recommended by CPMI to improve the efficiency of due diligence procedures and reduce compliance costs are now generally available for use, but their concrete implementation still requires continued focus by industry and the official sector, such as the use of the Legal Entity Identifier in payment messages and practical steps to support effective information sharing.

Should the situation deteriorate further, the FSB, the relevant standard-setting bodies and other stakeholders including international organisations and the private sector would consider whether further actions should be taken to address the issue.

Remittance service providers’ access to banking services: Monitoring of the FSB’s recommendations

The reduction in correspondent banking relationships has had a significant impact on remittance service providers’ ability to access banking services, particularly acute in those developing countries where remittance flows are a key source of funds for households.

The report assesses implementation of the FSB’s March 2018 recommendations to address problems that remittance service providers have accessing banking services. The report finds that, while positive steps have been taken in a number of areas, further work by national authorities, international organisations, remittance firms and banks is needed.

Jurisdictions have adopted or implemented a number of good practices and procedures to improve their supervisory frameworks for remittance firms and enhance coordination; authorities are responding to and accommodating innovative technology approaches in their regulatory frameworks; and significant technical assistance is being directed at the issue both at a global level and directly to affected jurisdictions.

Dialogue between remittance firms, banks and authorities responsible for supervision of the remittance sector has been useful, but has not led to tangible next steps. In order to make further progress, it is important to have a common understanding of issues facing remittance firms in their access to banking services and banks’ expectations concerning remittance firms’ anti-money laundering compliance.

The remittance report will be delivered to the G20 Finance Ministers and Central Bank Governors meeting in Fukuoka on 8-9 June.

Alexander Karrer, Chair of the FSB’s Correspondent Banking Coordination Group and Deputy State Secretary at the Swiss Federal Department of Finance, said: “The data shows that concentration in correspondent banking is increasing further, with countries and banks relying on fewer correspondent banks. We will continue to monitor the data and to coordinate the effective implementation of the agreed action plan to clarify regulatory expectations, provide technical assistance and make due diligence more effective. We stand ready to adopt further measures as necessary, as we did last year for remittance firms’ access to banking services, to preserve the smooth processing of cross-border payments.”

Notes to editors

The FSB launched its four-point action plan in November 2015 to assess and address the decline in correspondent banking. The plan covers:

  1. Further examining the dimensions and implications of the issue;
  2. Clarifying regulatory expectations, including guidance from FATF and BCBS;
  3. Domestic capacity-building in jurisdictions that are home to affected respondent banks; and
  4. Strengthening tools for due diligence in correspondent banks.

The FSB’s March 2018 recommendations to address problems that remittance service providers have accessing banking services cover:

  1. Promoting dialogue and communication between the banking and remittance sectors;
  2. International standards and oversight of the remittance sector;
  3. The use of innovation in the remittance sector and its possible role in enabling RSPs greater access to banking services; and
  4. Technical assistance on remittance-related topics.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Vice Chairman for Supervision, US Federal Reserve; its Vice Chair is Klaas Knot, President, De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.