Vulnerabilities in short-term funding markets need addressing, global watchdog says

LONDON, May 23 (Reuters): Vulnerabilities in widely used short-term markets for funding companies need to be addressed as stresses there can spread to the broader financial system during market turmoil, the global Financial Stability Board said on Wednesday.
The FSB published a report, opens new tab on the commercial paper (CP) and negotiable certificates of deposit (CD) markets, which were worth some $4.7 trillion at the end of March last year.
"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 FSB said in a statement.
Vulnerabilities include a limited secondary market due to the 'buy and hold' nature of the instruments, investor dealer concentration, and opacity, said the FSB, which is made up of central bankers, treasury officials and market regulators from the G20 economies.
Moves towards electronification of trading platforms have gained little traction, and industry-led initiatives have been limited in scale and impact so far, in part due to relatively low margins in the market, the FSB said.
Potential reforms include changes in the structure of markets, increased transparency such as through reporting data to regulators and publicly and increasing liquidity through private repurchase agreement (repo) markets.
"The idiosyncratic nature of CP and CD markets means that not all potential reforms may be appropriate or relevant for all jurisdictions," the FSB said.