Iosco draws systemic risk roadmap for securities regulators

International Organisation of Securities Commissions sets out ways in which securities authorities can help control systemic risk

The International Organisation of Securities Commissions (Iosco), an international group of securities and futures regulators, on Friday outlined ways in which securities regulators could quash the build-up of systemic risk.

Iosco said securities regulators in future should either have or feed towards a regulatory process to control systemic risk, calling for more internal resources to be allocated to this. Securities regulators should also have or contribute to regular reviews of regulatory boundaries.

The panel of regulators suggested, first and foremost, that securities regulators foster more disclosure and transparency. "Securities regulators have a particular responsibility and interest in promoting transparency at the market level as well as adequate disclosure at the product and market participant level."

Robust supervision of business conduct is necessary for dealing with conflicts of interest and the build-up of bad incentives. "Without it, incentives can quickly become distorted with drastic consequences such as increased leverage and risk in the system," the working group said.

Innovation and its implications for stability should be a focal point. Product innovation that builds opacity or poor risk management should, in particular, be closely monitored, the working group said, calling for an approach that strikes the right balance between "unrestrained innovation" and overregulation.

Because markets can act as channels for risk transmission, securities regulators should work with other regulators to improve the overall understanding of the economics of securities markets, their weaknesses, and their connection to the broader financial market. "Sharing market information and knowledge will be essential to deliver a truly efficient regulatory response to systemic risk." These efforts should be made on both national and international levels, the working group added.

Securities regulators must also develop risk measurements for systemic risk. In addition, they should develop knowledge on how to deal with systemic risk, once it has been spotted.

Scenarios
Securities regulators could also contribute in three different systemic risk scenarios. One was a major market imbalance, where a substantial mispricing appeared to have taken place and margins were being driven down to low levels. Here, for example, securities authorities could coordinate their efforts with other regulators; raise public awareness; and review prudential requirements to make sure they still reflect the level of risk in a particular market or product.

In another scenario, Iosco posited how regulators could act if there was a significant product under their watch on which there were regulatory arbitrage concerns, or a sizable maturity mismatch. Here, authorities could impose tighter disclosure requirements on the product; go over the distribution channels to retail investors; take a close look at the conduct of agents distributing the product, in particular; address any liquidity mismatch through a bigger regulatory requirement or calling for listing; and alert other regulators to potential gaps.

The guidelines were part of a key discussion paper produced by Iosco's Working Group on Systemic Risk, which was set up last July. The group was co-chaired by Quebec's Autorité des marchés financiers and the Ontario Securities Commission. Members included Brazil's Comissão de Valores Mobiliários; the China Securities Regulatory Commission; Germany's BaFin; Hong Kong's Securities and Futures Commission; the Securities and Exchange Board of India; the Israel Securities Authority; Japan's Financial Services Agency; the Securities and Exchange Commission of Nigeria; the United Kingdom's Financial Services Authority; Spain's Comisión Nacional del Mercado de Valores; and the United States' Security and Exchange Commission and Commodity Futures Trading Commission.

 

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