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Time for global securities regulators to step up to the plate
IOSCO – the international organization of securities markets regulators – is heading towards Beijing for its Annual Conference (May 13 -17) at a particularly important time. The repair of the global financial system is far from complete, securities markets included. And though most securities markets are showing some signs of life so far this year, the rebounds have been geographically uneven as market sentiment remains fragile in the light of continuing global financial strain.
If these challenges were not enough, a tectonic shift is underway in global financial markets. As the provision of traditional bank credit becomes constrained under the new Basel III framework; as leverage in the financial system decreases; and because public sector expenditure will remain squeezed for years to come, precluding it from taking up any slack – then, logically, market based financing of the global economy will have to increase to sustain global economic activity. Moreover, the expanding ‘’grey brigade’’ in our ageing societies is becoming ever more reliant on private pension plans and the long term performance of securities markets.
So, are global securities markets and their regulatory frameworks ready to step up to the plate and deliver first class, convergent regulation that can build investor confidence and widen the supply of investment capital at the right price?
IOSCO has major global regulatory responsibilities in this context. At the behest of the G20 and the Financial Stability Board, it is drawing up strong principle-based standards to prevent the recurrence of financial crises and build confidence. In the area of shadow banking, IOSCO is intensifying work on money market funds, securitisation and non-bank systemic financial institutions. In critical areas such as OTC derivative reform, in conjunction with the Committee on Payment and Settlement Systems (CPSS), IOSCO recently issued principles for financial market infrastructure, and margin and trade repository requirements. Credit default swaps, credit rating agencies, high frequency trading and price reporting agencies are also under the regulatory microscope. Ensuring that the sum and sequencing of these reforms dovetails with other regulatory changes in the banking and insurance fields remains a major challenge. The global financial market reform agenda is huge and urgent and now requires strong political determination to ensure effective implementation, rigorous monitoring and the provision of substantial technical assistance to emerging market countries.
Strikingly, the global financial industry wants IOSCO to play a bigger role to shape security markets standards before the emergence of national and regional laws. They believe this could considerably reduce frictional adjustment costs and cross-border conflicts of law.
The second pillar of IOSCO’s work is to build a stronger forward-looking capability to identify emerging systemic risks much earlier. This requires collecting and filtering the collective wisdom of securities regulators, leading market professionals and academics from all over the world. And “prioritizing” work to focus on the main collective action problems to answer the following type of questions:
- Do we now fully understand the interconnectivity of financial markets and are we dealing effectively with concentration of risks?
- Should we be concerned about the rapid, centrifugal fragmentation of financial intermediation, or not?
- Are new, innovative, high speed ways of trading good for financial market development?
- What are the right policies to develop market based financing for SME´s the world over?
- Are corporate governance regimes applicable to public companies robust enough?
- How can resolution regimes deal with major cross-border conflicts of law?
- Are market surveillance and enforcement regimes sufficiently deterrent and convergent to avoid global regulatory arbitrage?
The Beijing Conference will debate these issues and decide on IOSCO's future leadership for a new streamlined Board structure. It will begin also constructing a third pillar - an IOSCO Foundation - to strengthen education and training, technical assistance and research. Lastly, IOSCO’s Multilateral Memorandum of Understanding – a unique mechanism whereby IOSCO´s members exchange information for enforcement purposes which is due to be fully implemented by 1 January 2013 - will be thoroughly examined. The results, so far, are encouraging.
It is apposite that this years' IOSCO Annual conference takes place in China. In a country whose stock markets have grown tenfold over the last decade to become the second biggest group in the world and where continued strong growth is likely in the years ahead.
David Wright - Secretary General IOSCO