• Published on 22 May 2024
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FSB examines funding market vulnerabilities

The Financial Stability Board (FSB) published today a report analysing the functioning of, and considering potential ways to address vulnerabilities in commercial paper (CP) and negotiable certificates of deposit (CD) markets.

The report identifies a number of vulnerabilities in CP and CD markets, including limited secondary market activity due to the buy-and-hold nature of these instruments, investor and dealer concentration, and opacity. Dealers’ activity and revenues are concentrated in primary markets and while dealers may increase intermediation in times of stress, this has proven insufficient to meet spikes in liquidity demand. The high interconnectedness of CP and CD markets with other funding markets means that stress can be transmitted within the financial system and across borders, as experienced during the March 2020 market turmoil.

The report notes that moves towards electronification of trading platforms have gained little traction over recent years and, where platforms are used, they primarily facilitate primary market CP and CD issuance. Industry-led initiatives have been limited in scale and impact so far, in part due to relatively low margins in this market. The significant diversity of CP and CD markets across jurisdictions presents a challenge for formulating a uniform policy response.

The report examines potential market reforms by industry and public authorities to improve the functioning and potentially the resilience of CP and CD markets. They include changes in market microstructure; increased transparency in regulatory reporting and public disclosure; and increasing liquidity through private repo markets. While these reforms may have a positive impact for market functioning in normal times – particularly if used in combination and appropriately tailored to each jurisdiction – they would likely not, on their own, significantly enhance the resilience of CP and CD markets. Authorities are encouraged to explore the usefulness of these reforms for their own markets and to consider how these could complement other policies, such as addressing vulnerabilities in money market funds (MMFs).

 Re-disseminated by The Asian Banker