London — Brexit, tougher data privacy protection and a crackdown on foreign clearing houses risk fragmenting markets, bumping up costs and undermining efforts to avert another financial crisis, global regulators said on Tuesday.

The International Organisation of Securities Commissions (Iosco), which groups market regulators from the US, Japan, China, the EU and 30 other jurisdictions, said in a report that regulators are already working together more closely to avoid rules from disrupting cross-border trade.

“Nevertheless, some challenges remain and strengthening co-operation between regulatory authorities could further assist in addressing risks to the financial system stemming from market fragmentation,” Iosco said in a report.

Reforms introduced by the Group of 20 Economies (G20) to plug regulatory gaps uncovered by the financial crisis a decade ago may be unintentionally disrupting markets, the report said, echoing a longstanding view of global banks.

Iosco looked at how willing countries are to “defer” to each other on rules after trust among regulators was damaged by the financial crisis. Jurisdictions like the EU cited financial stability concerns for wanting close oversight of foreign financial firms that operate on their turf, sometimes leading to tension.

It took the US and the EU four years of politicised negotiation to accept a subset of their respective derivatives rules.

“Building trust and confidence in peer regulators is a cornerstone of any effective cross-border regulatory cooperation approach,” Iosco said in the report for G20 ministers meeting in Japan later this week.

Iosco said it would decide later in 2019 how to take its work forward, such as through formal “deference assessments”, but its powers are limited. It stops short of recommending a binding mechanism for resolving disputes over rules, which would be a step too far for many countries.

The World Federation of Exchanges urged G20 ministers to avoid divergence in rules, stop “politically motivated dissonance” overregulation, and to introduce global standards for crypto-assets.

The report said regulators have raised concerns about the consequences of Brexit, which would see Europe’s biggest financial centre leave the EU. The bloc rejected a proposal from Britain’s financial sector for “mutual recognition” or broad deference, saying it wants to maintain regulatory autonomy after Brexit. 

It has imposed tougher requirements on foreign derivatives clearing houses, a step aimed at clearers in London after Brexit, but which triggered concerns at the US Commodity Futures Trading Commission (CFTC).

“The use of deference can be a powerful way to mitigate the risks arising from fragmentation in cross-border trading markets,” said CFTC chair J Christopher Giancarlo, who co-chaired Iosco’s work on market fragmentation.

Citing other examples of potential fragmentation, the Iosco said Japan only allows a local clearing house for yen interest rate swaps.

The overseas reach of EU rules on data privacy, trading off-exchange derivatives and securities research are also singled out. The effect of US rules on trading derivatives may also warrant further examination, the report said, adding that the lack of global rules for crypto assets was a potential source of future fragmentation.