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Global policymakers are examining ways to enhance cross-border cooperation among regulators to combat the harmful effects of market fragmentation in wholesale financial markets.

The Financial Stability Board (FSB) published a report on Tuesday that recommends a variety of ways to address market fragmentation, particularly issues caused by differences in local regulation.

The report identifies instances where divergences in regulatory policy, or supervisory practices, can produce market fragmentation in areas such as over-the-counter (OTC) derivatives markets. It also sets out mechanisms that may enhance international cooperation.

The International Organization for Securities Commissions (IOSCO) also published its own report on Tuesday that looks at market fragmentation in wholesale securities and derivatives markets due to regulation, and considers actions regulators can take to minimize negative side effects.

IOSCO said that global regulators have become increasingly aware of the risks of unintended market fragmentation — such as opportunities for regulatory arbitrage, increased compliance costs, reduced market efficiency and liquidity — and are increasing cooperation to mitigate its effects, through mechanisms such as mutual reliance and deference.

Yet, it noted that there is still room for improvement.

“The use of deference can be a powerful way to mitigate the risks arising from fragmentation in cross-border trading markets. While its use has increased, the report highlights areas where further improvements could be sought while allowing members to continue choosing their own underlying tools to achieve it,” said Christopher Giancarlo, chairman of the U.S. Commodity Futures Trading Commission (CFTC), and co-chair of IOSCO’s work on market fragmentation.

The FSB says that it will review progress on the work to address market fragmentation in November.