INTERNATIONAL CAPITAL MARKET FEATURES
growth, for investors, for companies, and for governments, around the world; and why it is therefore essential that laws and regulations that affect them avoid any unintended adverse consequences that could inhibit those markets. At the heart of ICMA’s work to continue to strengthen the core areas of the international capital market over recent years, there has been a focus on the importance of market liquidity and collateral fluidity. So long as they are resilient, deep and liquid markets are inherently better able to strongly perform their economic function. Accordingly, it follows that ICMA’s efforts to promote more efficient markets includes seeking to remove barriers to their smooth cross-border functioning and seeking to resist the imposition or emergence of changes which would lead to unnecessary market fragmentation or disruption. One of the consequences of new regulation since the financial crisis has been to increase the costs for banks in making markets. Alongside this, corporate bond markets are less liquid now than they were previously, particularly for smaller buy-side firms. Also, in the sovereign bond market, there is a close link between bond, CDS and repo market liquidity (collateral fluidity) – and repo dealer balance sheets have shrunk, while QE has accentuated collateral scarcity by taking securities from the market. And, on top of international capital market fragmentation pressures, the markets must now also contend with widening spreads and rising interest rates. If international capital markets fragment there will be detrimental consequences, such as: • added financing costs for corporate and government endusers, weakening their financial position and increasing the likelihood of defaults: - borrowers’ bond financing costs increase, as investor demand is reduced responsive to lower liquidity and smaller pools of investors for each market fragment; and
So long as they are resilient, deep and liquid markets are inherently better able to strongly perform their economic function.
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- financial institutions need to hold more capital and more liquid assets if they have to operate under a number of divergent regulatory regimes rather than under a single regime, restricting their capacity to lend and/or increasing the cost of loans they make. • risks for financial stability: - divergent regulatory regimes lead to regulatory arbitrage between them; and - financial institutions face greater risk of nonperforming loans and increases in their own financing costs, hence undermining their profitability and longer-term sustainability. In light of this, the task of preventing fragmentation of international capital markets and taking initiatives to help increase their integration is not just of interest for the users of markets but is also demonstrably in the interests of policy makers and those they represent.
Contact: David Hiscock david.hiscock@icmagroup.org