Structured product manufacturers will not have been surprised by the findings of the recent IOSCO report into Market Fragmentation and Cross-border Regulation published in June 2019.
The report Market Fragmentation & Cross-border Regulation confirms something which most market participants are already painfully aware; financial regulation and supervision may be leading to a reduction in cross-border flows and increased costs to firms in both risks and fees.
The report highlights 3 specific areas where regulatory driven market fragmentation has occurred in practice;
- G20 derivatives reforms leading to jurisdictional trading and clearing fragmentation – reducing liquidity
- Inconsistent derivatives trade reporting rules – increasing firms costs
- Individual countries data protection laws – leading to uncertainty over data transfers
Global structured product manufacturers are still working through the implications of recent regulatory changes such as MIFID II, where for example, product governance investor protection rules governing the manufacturing and distribution of structured products may have extra-territorial application which in some cases conflict directly with local regulatory practice.
Firms must assess the extraterritorial effects of new regulations, either through internal dialogue or by engaging external specialists and then reflect this in policies often covering multiple regions.
Even with the EU, manufacturers have seen a wide range of different local market interpretation of PRIIPs rules, KID reporting requirements and regulatory feedback on KID content. The implementation of EU Prospectus Regulation is also likely to see inconsistent application by different approving authorities.
The IOSCO report concludes that many regulators are aware of the problems, and the risks, and that there has been increased collaboration to mitigate its effects. Under IOSCO’s framework there are further opportunities to cooperate across borders and regions, and to formalise the reliance on respective regulatory regimes.