Addressing Market Fragmentation Through The Policymaking Lifecycle

This article was first published on August 6, 2020. 

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The COVID-19 pandemic provides an opportunity to understand the risks and global impact of regulatorily driven market fragmentation in practice, as well as the value of a more comprehensive approach towards mitigating its impact on financial institutions, markets, and end users.

This paper expands upon the existing body of analysis developed on market fragmentation in capital markets by offering a comprehensive framework for analysing fragmentation; identifying its drivers; examining its impact on markets, economies and end-users; and developing holistic solutions to avoid or mitigate fragmentation and its effects in future.

We posit that market fragmentation and its effects must be addressed throughout the policymaking lifecycle, namely through:

  • Better Leveraging Existing International Coordination Structures;
  • Considering Fragmentation Issues During Regulatory Design;
  • Accounting for Fragmentation Concerns in Implementation;
  • Systematic Post-implementation Review & Assessment; and
  • Maintaining Robust Feedback Mechanisms.

Through case studies from market participants, we apply the above framework to ‘legacy’ (i.e. previously identified) examples of fragmentation as well as new, or ‘emerging’ areas of concern.

Recognising Asia Pacific’s inherent complexity and susceptibility to fragmentation, we offer the practical and meaningful recommendations, demonstrating the framework’s robustness and suitability for dealing with fragmentation in other regions and at a global level.

Once the current COVID-19 crisis subsides, policymakers and industry have an important opportunity to reflect on the effectiveness and impact of regulations, including their unintended consequences in relation to market fragmentation. For future policymaking, we welcome dialogue on implementing a more holistic approach to assessing fragmentation consistently throughout the policymaking lifecycle by both the international standard setting bodies and national regulators.

Addressing Market Fragmentation Through The Policymaking Lifecycle