A press release titled, "FSB examines vulnerabilities in short-term funding markets" states, "The Financial Stability Board (FSB) published ... a report analysing the functioning of, and considering potential ways to address vulnerabilities in, CP and negotiable 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." (Note: There are just 2 weeks to go until our big Money Fund Symposium! We're still taking registrations, and we hope to see you in Pittsburgh June 12-14!)

It explains, "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 release continues, "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 (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)."

It adds, "This work forms part of the FSB's work programme on enhancing the resilience of NBFI [non-bank financial institutions]. It follows up on the 2021 FSB report with policy proposals to enhance MMF resilience, which noted that policies to enhance the resilience of MMFs could be accompanied by measures to improve the functioning of the underlying short-term funding markets. Further details on the FSB's work programme to enhance resilience in NBFI can be found in its latest progress report."

The Financial Stability Board's full report, "Enhancing the Functioning and Resilience of Commercial Paper and Negotiable Certificates of Deposit Markets," states, "The focus of this report is commercial paper (CP) and negotiable certificates of deposit (CD) (henceforth referred to as CP and CD) in core funding jurisdictions (EU, Japan, UK, US). With a total of USD 4.7 trillion outstanding as of end-March 2023, the US CP and CD market is the largest globally. Europe has different market segments across issuer domicile and currency as well as two international markets -- London-based Euro Commercial Paper (ECP) and Paris-based Negotiable European Commercial Paper (NEU CP). The ECP market is the second largest (estimated at USD 1 trillion outstanding as of March 2021), around 48% of which is denominated in US dollars."

It tells us, "The NEU CP market has USD 315 billion outstanding as of end-March 2023, 85% of which is Euro-denominated. The Japanese market has USD 380 billion outstanding as of end-March 2023, with all issuance in JPY. The overall size of US and EU markets remains much smaller than its all-time high in 2007. By comparison, the Japanese market has grown since 2007. The microstructure, legal framework and existing transparency vary across jurisdictions and markets, highlighting the importance of tailoring potential market reforms to the characteristics of each market."

Discussing "Vulnerabilities," the report says, "The analysis has largely confirmed the findings of previous work -- namely, that these markets, although subject to inefficiencies, tend to generally function well in normal times but are susceptible to illiquidity in times of stress. Investors tend to buy CP and CDs when they are first issued and usually hold them until maturity given the short-term nature of these instruments, which results in very limited secondary market activity in normal times. Dealers' activity and revenues are concentrated in primary markets. Investor requests to sell CP and CD in the secondary market pick up in times of stress, and whilst dealers may increase their intermediation in such episodes, this has proven insufficient to meet the spike in liquidity demand observed in, for example, the March 2020 market turmoil."

It continues, "Concentrations of investor and dealer participation/activity also represent sources of vulnerability, especially during times of stress. The primary issuance market, where most activity takes place, is intermediated by a small number of core dealers <b:>`_that typically act as a single point of market entry. `The limited number of intermediaries means that they may not be able to respond to spikes in liquidity demand in times of stress. Moreover, money market funds (MMFs) that are important CP and CD investors -- particularly in European markets -- can be susceptible to large and sudden redemption requests in times of stress, thereby exacerbating the demands on liquidity, while there do not currently appear to be many other investors that could act countercyclically."

The FSB writes, "The opaqueness of CP and CD markets may exacerbate illiquidity due to information asymmetry amongst market participants and could contribute to reliance on dealers. A lack of public data across CP and CD markets -- especially on issuers' outstanding amounts, the profile of investors, and post-trade information, including pricing -- presents a challenge for the monitoring of these markets, and may at the margin discourage broader investor participation. Disclosures vary by market -- for instance, there is no single comprehensive publication of all issuances in the ECP market. Whilst several commercial data providers offer subscription services, they do not cover all data gaps, and can be prohibitively expensive for smaller market participants."

They explain, "With regards to market microstructure, the focus of FSB work had previously been on dealers, but this initiative shed light on the role of the electronic trading platforms. These platforms mainly facilitate CP and CD issuance in the primary market and are typically dealer intermediated. Platforms may also serve as 'workflow tools', but operational inefficiencies remain, while the variety and fragmentation of platforms may inhibit broader investor adoption. Moves towards electronification and digitisation in both primary and secondary CP and CD markets have not gained much traction, and little has changed in terms of enhancing liquidity and resilience in times of stress. In addition, digitisation of documentation is not currently widespread across markets -- only the NEU CP and Japanese markets currently have market-wide digitisation -- but pockets of digitisation exist within markets, for instance, on certain platforms."

The FSB report adds, "The high interconnectedness of these markets with other global funding markets means that stress can be transmitted across the financial system and across borders. While issuers in general have diversified sources of funding, including contingency funding (a number of corporate issuers have backup lines of credit in place, and bank issuers have access to central bank facilities), losing access to CP and CD markets may put pressure on alternative sources of funding. A freeze of these markets can generate cross-border spillovers, especially for non-US banks issuing CP and CD for USD-denominated funding. Evidence of these vulnerabilities can be found in the March 2020 market turmoil when CP and CD market stress prompted public authorities to intervene to restore market functioning and access to this type of funding."

On money market funds, they write, "Since March 2020, some authorities have taken or are planning measures to improve the resilience of key investors in CP and CD markets, such as MMFs. As noted in the FSB's MMF peer review, it is important that effective measures to enhance MMF resilience are implemented across jurisdictions. While these measures are expected to have a positive effect on overall market conditions, the susceptibility of CP and CD markets to illiquidity in times of stress remains. Hence, there is merit in exploring structural changes in CP and CD markets to complement reforms on the investor side and enhance the functioning and resilience of those markets."

The FSB also says, "Private repo markets may provide a channel for investors and intermediaries to generate liquidity against CP and CD collateral, but expansion of these markets is subject to a number of challenges and risks. Expanded ability to finance CP and CD in the repo market may increase dealers' funding efficiency in normal times. Certain jurisdictions may want to consider whether repo markets might also potentially reduce selling pressure in times of stress. Well-functioning but modest sized repo markets for CP and CD collateral already exist in the US and to a much lesser extent in Europe."

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