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Independent, well-funded regulators are essential to the development of deep, liquid capital markets, according to new report published Wednesday from the Committee on the Global Financial System (CGFS).

The CGFS monitors developments in global financial markets for central bank governors.

The report points to a number of factors that are necessary for supporting robust markets, including macroeconomic stability, strong legal frameworks and market infrastructure, and effective regulation.

“Deep and liquid capital markets not only need robust and efficient market infrastructures, they also need supportive legal systems and investor diversity,” says Philip Lowe, chairman of the CGFS, in a statement. “Independent market supervisors are also vital for well-functioning capital markets. They need adequate resources to identify problems and sufficient powers to tackle them.”

“Independent regulators with well-defined objectives, adequate resources and credible enforcement powers are better able to protect investors, lower issuance costs and ensure that capital markets are fair, effective and transparent,” the report states.

The report’s findings were bolstered by a survey of market participants in 10 economies, ranging from China and Brazil to Japan and the United Kingdom, which showed that high regulatory costs can make capital markets less effective in channelling financing to the economy. Also, a greater presence of foreign investors in domestic markets lowers funding costs, boosts liquidity, helps lengthen bond maturities and improves risk management practices.

Based on its findings, the report recommends policy measures for bolstering capital markets:

• Promote greater market autonomy by addressing financially repressive policies, such as restrictions on initial public offerings to prop up stock market valuations or misuse of regulatory instruments that enable some to borrow at below-market rates
• strengthen investor protection and legal enforcement;
• enhance regulatory independence, resources and enforcement powers;
• increase the depth and diversity of the domestic institutional investor base;
• actively engage with potential market entrants and prepare for spillover risks;
• co-ordinate regulations to develop deep complementary hedging and funding markets.

“Capital market development can be placed on firmer foundations by strengthening legal and judicial systems for investor protection. Policies that ease access to legal recourse lower the cost of private contract enforcement and sanctioning breaches of duty,” the report states. “In addition, raising the efficiency, consistency and fairness of legal proceedings, eg through the creation of specialised financial courts, could usefully boost investor protection, as would policies that raise the predictability and efficiency of insolvency procedures.”

Read the report here.