Financial supervision calls for stricter rules for bond and defi markets

The Bank for international payment compensation has requested stricter rules to prevent borrowing from reinforcing the risks of financial market stability, and has campaigned for a stricter supervision of blockchain-based decentralized finances.

The umbrella organization of the central banks worldwide said in its most recent quarterly review that measures were necessary after bond funds were forced to sell assets "to an increased extent". An abrupt and widespread rush to the exits from these funds added to the volatility caused by the Coronavirus on the pension markets, which was only relieved by massive interventions of the central banks, the BIZ shared.

The request complements previous proposals for new security measures by the IMF, the Financial Stability Board and the international organization of the securities supervisory authorities.

"The turbulence raised the question of whether the pension funds' own lines of defense can prevent a potential increase in the risks in stress phases," said BIZ. A destabilizing "emergency sale" of financial assets could have arisen if the central banks had not intervened with a variety of emergency measures, including huge new purchase programs for assets, many of which still exist.

pension funds have 18 percent of the outstanding US company bonds and 17 percent of the outstanding corporate bonds of the euro zone, which gives these vehicles a decisive influence on pricing.

Most pension funds enable end investors to withdraw their money with just one day, but the BIZ said that longer notice periods could be introduced to remove the problem of trying out the problem of selling illiquid assets in a falling market.

The analysis suggests that the managers of pension funds have overestimated how much of their portfolio they could sell in a single day to obtain cash, especially in volatile market conditions.

The biz also suggested that actively managed pension funds could transfer bonds instead of cash to customers under certain circumstances. This so -called "withdrawal" is already available for index -portrait Exchange Traded Funds. It effectively transmits a greater price risk from a portfolio manager to an end investor.

Fixed-Ince managers could also make more use of "Swing Pricing" by reducing the value of the withdrawal of investors who want to repay immediately from a fund in times of market stress. Swing Pricing can reduce the first-mover advantage that an investor wins in a way that can be sold out in front of others that can pull the prices down.

The biz also commented on the quick and unattended growth of decentralized financing. The authors of the paper said that these new markets can pose a threat to financial stability if they enter mainstream activities, sometimes because Defi is missing shock absorbers such as banks. Defi is based on the idea that preprogrammed algorithms do transactions without human intervention and handle without central authority.

"If Defi is widespread, his weak points could undermine the financial stability," says the report.

This is the first time that the BIZ warns for caution in terms of defi markets, although it previously emphasized risks related to stable coins that support decentralized transactions.

"There is a 'decentralization illusion' in defi, since the need for governance makes a certain degree of centralization inevitable and structural aspects of the system lead to a concentration of power," said the authors of the report.

The biz said that political decision -makers should concentrate on addressing managers, owners of platforms and codes on which transactions take place, and found that they were "the natural entry points for political decision -makers".

The defi markets have grown exponentially in the past 18 months, with the total amount of the funds bound to defi services last year by $ 1,700 percent, according to the data specialist Elliptic.