Regulatory Fragmentation in Markets Undermines Economic Recovery

Fragmentation introduces distortions and inefficiencies, undermining financing when it is needed to facilitate the recovery from Covid-19, ASIFMA says in a new report.

ASIFMA has released a new report in collaboration with Oliver Wyman offering a comprehensive framework for analysing regulatory-driven market fragmentation.

The report identifies the key drivers of fragmentation; examines its impact on markets, economies, investors and other end-users of the financial system; and develops holistic solutions to avoid and mitigate fragmentation and its effects in future.

The drivers of fragmentation identified in the report include:

  • A lack of global standards resulting from  jurisdictions independently defining policy objectives, approaches and standards
  • Extraterritoriality of national or regional regulations, whereby US and EU requirement may undermine Asia Pacific markets and regulations
  • Regulator-imposed localisation and ringfencing requirements to protect domestic markets, which reduce interconnectedness with the global financial system and undermine the efficient deployment of capital, liquidity and information
  • Inconsistent implementation of standards, which results in market distortions, negative consequences for markets and end-users, and impedes overall policy objectives

“While some market fragmentation may be appropriate in limited circumstances, current and emerging regulation introduces market distortions and inefficiencies, undermining financing required to meet Asia Pacific’s economic development needs,” the report says.

“In addition to reducing market liquidity, fragmentation observed in Asia Pacific also impedes use of global best practice, such as in relation to risk management, data protection and operational resilience.”

The report argues that market fragmentation and its effects must be addressed throughout the policymaking lifecycle through:

  • Better leveraging of existing international coordination structures
  • Methodically considering fragmentation issues at the regulatory design stage
  • Reflecting fragmentation concerns in implementation and supervisory considerations
  • Pre-planning and performing systematic post-implementation reviews
  • Allowing for better feedback mechanisms to ensure introduced regulation is improved over time

“Asia Pacific is an inherently complex region and susceptible to fragmentation. In some areas, the difference in regulatory approach is substantial,” said ASIFMA head of policy and regulatory affairs, Matthew Chan. “For many financial institutions that operate and serve clients in multiple markets, navigating a myriad of requirements across jurisdictions creates operational complexity.”

“A divergent and uncoordinated approach by individual regulators, as well as deliberate choices to ringfence capital and localise data for example, both hinders the continued development of the region’s capital markets, and risks adding to future market stress at a critical time when economies are looking to the financial sector to facilitate economic recovery from Covid-19.”

The report identifies both legacy (derivatives, benchmarks, capital requirements, etc.) and emerging (sustainable finance, data privacy, financial crime compliance, etc.) areas of market fragmentation, offering specific recommendations in each of these areas.

“Market fragmentation is an inherent concern in Asia Pacific given that there are 20+ markets and the lack of a regional coordinating body,” says Peter Reynolds, partner and head of Greater China at Oliver Wyman. “Without addressing this, markets in the long term will lose out on the efficiency and efficacy gains that coordinated approaches to regulations bring.”

The full report is available here.

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