Cross-border market integration is “essential”, WFC panellist says
05 June 2023 Czech Republic
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It’s important that smaller market’s aren’t left behind when it comes to financial market integration, a panellist at this year’s World Forum of Central Securities Depositories (WFC) warned.
The statement was made by Jim Turnbull, deputy director of capital and financial markets development at the European Bank for Reconstruction and Development, on a panel discussing cross-border transactions and the international connection of issuers and investors.
Turnbull went on to say that regulation and supervision must be cost-effective and consistent, and align with the interests of investors.
Vojt?ch Belling, executive director of the Department of Financial Regulation and International Cooperation at the Czech National Bank, commented on the lack of consistency across European regulations. Definitions of key concepts are often absent, for example what constitutes a shareholder or what a security is, and several direct and indirect barriers to market entry remain in place, particularly for small and medium enterprises. While the European Commission is working to find solutions for some of these issues, he added that there is a need for political convergence across the region in order for supervisory consistency to be achieved.
In order to achieve growth, central securities depositories (CSDs) need to do as much as possible to allow foreign institutions to enter domestic markets, one speaker stated. Providing asset servicing can be a draw for international investors, they noted, however a number of regulatory barriers remain in place, preventing integration.
The panellist went on to encourage financial intermediaries to be open rather than overprotective, with Turnbull adding that if jurisdictions attempt to protect their own markets by limiting inward investment, they end up limiting their capacity to grow. In the retail market, Belling raised the possibility of investors seeking out unregulated environments, such as crypto assets or less regulated markets, if they see regulation as too stifling.
Panellists considered the risk of contagion that comes with more integrated markets, with Belling stressing the importance of strong risk management operations and prudential regulation. He went on to say that while integration may introduce a greater contagion risk, without it local markets in small open economies are less resilient and the ecosystem is not less fragile.
Following financial sanctions on Russia and the deconstruction of market interoperability that followed, Turnbull reassured that “integration is not dead” — it’s now operating in silos. He affirmed the importance of financial sanctions on “rogue” market participants, adding that they, and the fragmentation they cause, should be an expected part of the financial ecosystem.
The question of whether many jurisdictions’ moves to T+1 will help or hinder cross-border integration, Turnbull reported that a number of US institutions would prefer the shortened settlement cycle to be limited to domestic trades due to the increased risks that it could bring to international settlement. He anticipated that T+1 will become a global reality “as technology will allow it”, but warned that, in reality, it may be slower than many expect.
Belling highlighted opportunities such as the reduction of counterparty risk, as well as challenges including the time difference, operational risk and automation issues, that will arise from T+1 adoption, stating that “we will see if the pros or cons win out”.
The majority of panellists agreed that financial market integration is a positive change, with Turnbull calling it “not only helpful, but essential”. Belling suggested that “it may not be for everyone,” but conceded that it will be essential for small open economies.
When asked what financial market infrastructures should be prioritising to accelerate integration efforts, consistency and harmonisation emerged as the most important factors. Streamlined processes, cost-effective solutions and effective regulation will be essential for success, the speakers concluded.
The statement was made by Jim Turnbull, deputy director of capital and financial markets development at the European Bank for Reconstruction and Development, on a panel discussing cross-border transactions and the international connection of issuers and investors.
Turnbull went on to say that regulation and supervision must be cost-effective and consistent, and align with the interests of investors.
Vojt?ch Belling, executive director of the Department of Financial Regulation and International Cooperation at the Czech National Bank, commented on the lack of consistency across European regulations. Definitions of key concepts are often absent, for example what constitutes a shareholder or what a security is, and several direct and indirect barriers to market entry remain in place, particularly for small and medium enterprises. While the European Commission is working to find solutions for some of these issues, he added that there is a need for political convergence across the region in order for supervisory consistency to be achieved.
In order to achieve growth, central securities depositories (CSDs) need to do as much as possible to allow foreign institutions to enter domestic markets, one speaker stated. Providing asset servicing can be a draw for international investors, they noted, however a number of regulatory barriers remain in place, preventing integration.
The panellist went on to encourage financial intermediaries to be open rather than overprotective, with Turnbull adding that if jurisdictions attempt to protect their own markets by limiting inward investment, they end up limiting their capacity to grow. In the retail market, Belling raised the possibility of investors seeking out unregulated environments, such as crypto assets or less regulated markets, if they see regulation as too stifling.
Panellists considered the risk of contagion that comes with more integrated markets, with Belling stressing the importance of strong risk management operations and prudential regulation. He went on to say that while integration may introduce a greater contagion risk, without it local markets in small open economies are less resilient and the ecosystem is not less fragile.
Following financial sanctions on Russia and the deconstruction of market interoperability that followed, Turnbull reassured that “integration is not dead” — it’s now operating in silos. He affirmed the importance of financial sanctions on “rogue” market participants, adding that they, and the fragmentation they cause, should be an expected part of the financial ecosystem.
The question of whether many jurisdictions’ moves to T+1 will help or hinder cross-border integration, Turnbull reported that a number of US institutions would prefer the shortened settlement cycle to be limited to domestic trades due to the increased risks that it could bring to international settlement. He anticipated that T+1 will become a global reality “as technology will allow it”, but warned that, in reality, it may be slower than many expect.
Belling highlighted opportunities such as the reduction of counterparty risk, as well as challenges including the time difference, operational risk and automation issues, that will arise from T+1 adoption, stating that “we will see if the pros or cons win out”.
The majority of panellists agreed that financial market integration is a positive change, with Turnbull calling it “not only helpful, but essential”. Belling suggested that “it may not be for everyone,” but conceded that it will be essential for small open economies.
When asked what financial market infrastructures should be prioritising to accelerate integration efforts, consistency and harmonisation emerged as the most important factors. Streamlined processes, cost-effective solutions and effective regulation will be essential for success, the speakers concluded.
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