10 July 2024

ICMA's Richards: Third Quarter 2024 Report

ICMA’s role and priorities in ever-changing markets; Increasing focus on NBFI:where next? The debate about EU policy on Capital Markets Union; Developments in Primary markets; Secondary markets; Repo and collateral markets; Sustainable finance; FinTech and digitalisation

Foreword - Carey Evans

Following the 2008/09 Global Financial Crisis (GFC), public
authorities around the world moved decisively to re-wire the
regulatory framework for the banking system – limiting the
types and overall amount of risk that banks take on relative
to their size and capital structure.
These reforms aimed to enhance the resilience of the banking
sector: bank capital and liquidity requirements increased;
bank resolution frameworks were developed; market
infrastructures were bolstered to mitigate counterparty
credit risk; and the largest banking institutions were
identified and required to have additional capital and
supervisory requirements.
To some stakeholders, the perception that capital markets
have grown in relation to the banking system since the
GFC is evidence that risk has migrated from the banking
system to what has been variously called market-based
finance, “shadow banking”, or the most recent preferred
nomenclature, non-bank financial intermediation (NBFI). This
perception can sometimes overlook the fact that many parts
of the NBFI ecosystem are already also highly regulated,
transparent and resilient.
How supervisors and regulators should look at financial
stability beyond the banking sector has been an important
debate over the last decade or more. In that time, policy
makers globally have moved from a starting point of potential
“designation” of large non-banks as systemically important
(singled out for additional regulatory or supervisory
requirements) to an approach which has focused more on
regulating specific “products” or “activities” that can give
rise to specific risks that can rise to the level of system-wide
concern.
This has led the Financial Stability Board (FSB) in recent
years to look for ways of enhancing the resilience of money
market funds (MMFs) and short-term markets, liquidity
management tools in open-ended funds, leverage, and
margin preparedness (to name a few). Recently, authorities
in Europe have begun to consider the pros and cons of a socalled
“macroprudential” toolkit for non-banks, and the Bankof England recently undertook a project to better understand
how markets function under stress – the system-wide
exploratory exercise (SWES).
How should the conversation move forward in a way that
truly enhances the resilience of the financial system? A few
thoughts:
1 The definition of financial stability needs to be appropriate
to markets. The goal of financial stability policy in a banking
context is relatively straightforward: avoiding insolvency and
institutional failures. In a market context, the objective is not
always so clear cut. Sometimes, price volatility is seen as a
sign of financial instability. But price volatility is often a sign
that markets are working well: changing the price at which
risk is transferred and absorbed in real time.
Markets become dislocated when the diversity of buyers or
sellers is reduced, and in the extreme, markets can become
one-sided. Things like concentration or market structures
that rely on a specific type of intermediation can be risk
factors here, and policy and regulatory incentives can
increase risk too.
2 We need to improve the overall liquidity capacity, the
process of liquidity transformation, and transfer. Post-crisis
regulation has increased the importance of collateralising
risk, which requires the movement of cash through the
financial system on an intra-day basis. At the same time,
Basel reforms have incentivised banks to shrink shortterm
liabilities, which in turn has reduced their ability and
willingness to hold cash for certain market participants or to
provide liquidity through repo. While clearing and margining
practices have undoubtedly enhanced systemic resilience,
this tension means that market volatility can more easily
result in liquidity pressures and market stress.
This needs to be considered further by policy makers.
• The ability to store and access cash and liquidity in new
ways is critical: in the US, workable sponsored access repo
models provide access to liquidity in the clearing system to
the broader market; and the Fed’s Reverse Repo Programprovides MMFs with a cash placement option when banks
cannot absorb excess cash on an overnight basis, and in
turn underpins their ability to be a highly liquid store of
cash for a range of users.
• Equally, exploring ways to increase collateral efficiency
and transferability can ease frictions on markets that
can arise from the need to generate liquidity for margin
purposes.
3 The importance of data. Supervisors’ ability to understand
how and where stresses arise in markets is contingent on
sourcing data from the wider market ecosystem. This is at
the heart of the Bank of England’s SWES process.
Further enhancing reporting obligations for market
participants could be a likely outcome of policy efforts in this
space. If done properly, it can both help regulators better
understand market risks, and also enhance market risk
management practices as well.
Financial stability is not just a “public good” – it is firmly in
the interest of market participants as well. To advance a
policy framework that truly enhances the resilience of the
financial system, policy makers will need to look beyond
banks, and beyond the bank policy toolkit and regulatory
paradigms.
Bringing together a variety of market participants in core
markets, and with deep expertise in market efficiency and
dynamics, ICMA has a unique perspective to offer policy
makers as the focus of debate moves towards promoting
resilient market ecosystems.

ICMA

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