Saturday, November 05, 2011

G-20 Leaders Endorse Regulation of Shadow Banking System and Say No Firm Is Too Big to Fail

In their final communiqué from the Cannes Summit, the G-20 leaders endorsed the regulation and oversight of the shadow banking system composed of hedge funds, private equity funds and other non-bank firms. The leaders also pledged to address the risks posed by high frequency trading and dark liquidity as part of further regulation to enhance market integrity and efficiency. They have asked IOSCO to assess the functioning of credit default swaps markets. The G-20 leaders acknowledged the initiatives in some member countries to tax the financial sector for various purposes, including a financial transaction tax, inter alia, to support development.

Importantly, the G-20 leaders agreed on comprehensive measures so that no financial firm can be deemed too big to fail and to protect taxpayers from bearing the costs of resolution. The Financial Stability Board concomitantly published an initial list of global systemically important financial institutions, which will be subjected to enhanced regulation, a new international standard for resolution regimes, and additional capital requirements. The leaders are also prepared to identify systemically important non-bank financial entities.

The leaders promised that they would not allow a return to pre-crisis behaviors in the financial sector and would strictly monitor the implementation of legislation and regulations regarding banks, OTC derivatives markets and executive compensation practices. As part of their financial regulation agenda, the leaders endorsed the IOSCO recommendations to improve regulation of commodity derivatives markets. They agreed that market regulators should be granted effective intervention powers to prevent market abuses. In particular, market regulators should have and use formal position management powers, among other powers of intervention, including the power to set ex-ante position limits, as appropriate.

Building on its achievements, the leaders agreed to reform the FSB to improve its capacity to coordinate and monitor their financial regulation agenda. This reform includes giving it legal personality and greater financial autonomy. They announced the appointment of Mark Carney, Governor of the Central Bank of Canada as Chairman of the FSB, and of Philipp Hildebrand, Chairman of the Swiss National Bank as Vice-Chairman.