Central banks and regulators are reviewing the impact of COVID-19 on financial markets and considering the appropriate balance between private sector resilience and reliance on extraordinary central bank liquidity support. With ongoing concerns about the potential impacts of the rate of economic recovery and heightened credit risk, regulators are undertaking further analyses and are contemplating additional requirements.

The pandemic has also renewed their determination to pursue issues that were already on regulatory agendas, including the transition to risk-free rates (RFRs) and liquidity management in open-ended investment funds. Firms should factor these debates into the reviews of their operations and risk assessments.

Key topics covered in this paper include:

Although financial markets have recovered to almost pre-crisis levels, there are ongoing concerns about the decoupling of financial market performance and underlying real economic activity. Regulators are reviewing, collectively and separately, the “pinch points” or vulnerabilities in market-based finance or non-bank financial intermediation.

Central Counterparties and clearing members should expect to see more supervisory scrutiny around their measures to limit pro-cyclicality and their operational management of margin and liquidity, given the impact large margin calls had on the distribution of liquidity in the market.

While regulators continue to analyse the systemic risk of liquidity mismatches in open-ended investment funds, fund managers should ensure existing liquidity management tools are used in a timely manner and should expect ongoing supervisory scrutiny in this area.

Progress has been made by regulators and the industry on the mechanics of the transition to RFRs and IBOR reform. Firms need to continue to focus on active transition and risk management of their LIBOR-exposed portfolios before the end-2021 deadline.

Global regulatory cooperation and international reforms of the financial system helped it to absorb the economic shock of the pandemic. Continued global regulatory collaboration and co-operation is key to help aid economic recovery.

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