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FSB Publishes Update on Market Reform Plan

Following its meeting held in London last
week, the Financial Stability Board (FSB) has issued an update to its ongoing
plan to reform financial markets.

On liquidity issues, something that
dominated discussions at Forex Network Chicago last week, the FSB has issued a
further warning to investors and asset managers over taking liquidity for
granted.
The FSB has been working,
based on the work plan it agreed in March, to identify risks associated with
market liquidity and asset management activities in the current market
conditions, as well as potential structural sources of vulnerability associated
with asset management activities.

It says it will
evaluate in the first phase the role that existing or additional activity-based
policy measures could play in mitigating potential risks, and make policy
recommendations as necessary. It adds that at the meeting, possible risk
scenarios were reviewed and attention was called to “elevated near-term risks
due in part to the unwinding of extraordinary policies, potentially under
conditions of reduced market liquidity in fixed income markets”.

In light of such
scenarios, the FSB says it encourages the appropriate use of stress testing by
funds to assess their ability, individually and collectively, to meet
redemptions under “difficult” market liquidity conditions.

The meeting also
reviewed the initial findings from the longer-term work on asset management
structural vulnerabilities and identified areas for further analysis. These
include the mismatch between liquidity of fund investments and redemption terms
and conditions for fund units; leverage within investment funds; operational
risk and challenges in transferring investment mandates in a stressed
condition; securities lending activities of asset managers and funds; and potential
vulnerabilities of pension funds and sovereign wealth funds.

The meeting was also
given an update on derivatives market reform but no new concrete measures were
presented, the meeting merely stressed the importance of cross-border
cooperation and “welcomed recent examples of this engagement”.

The meeting also
reviewed the FSB’s progress on its coordinated work plan to reduce misconduct
risk and discussed potential next steps to advance the work plan in 2016. In
particular the meeting took stock of the role of incentives, such as
compensation, corporate governance frameworks and regulatory enforcement, in
reducing misconduct, the FSB says, adding that the Plenary considered a report
on implementation of recommendations agreed in 2014 to reform FX benchmark
practices, which is due to be published next month.

Additionally it discussed
the work led by the Bank for International Settlements to develop a single
global code of conduct for the foreign exchange market.

Colin_lambert@profit-loss.com  Twitter @lamboPnL 

Colin Lambert

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