Financial Stability: Major Focus of IOSCO Conference
by Kathryn M. Trkla
This year's annual conference and meetings of the International Organization of Securities Commissions (IOSCO), held in Lisbon, Portugal from May 22-28, focused on the theme "New Century, New Challenges in the Financial Markets." This XXIVth annual gathering attracted participants from more than 200 government agencies, exchanges and other self-regulatory organizations, international organizations, trade associations, businesses and other institutions.
Conference panels covered the major issues one would expect to see high on the list of the financial market regulators who make up IOSCO's core constituency: stability and efficiency of financial systems; Year 2000 preparations and readiness; impact of the Euro on markets; Internet issues; and funds management. Investor education was also a hot topic this year, the subject of both a conference panel and a luncheon presentation by SEC Chairman Arthur Levitt. Other conference panels, on cross-border securities offerings and corporate governance of public companies, adhered more closely to IOSCO's traditional securities market focus. (IOSCO is, after all, predominantly an organization of securities regulators.) All of the conference panels touched in some fashion on the related themes of globalization of financial markets, technology and investor protection.
The CFTC's rulemaking proposal on foreign terminals-since rescinded in this new post-Born era-was not a topic of discussion on the conference panels, notwithstanding the controversy and flurry of activity it generated in the U.S. This is not too surprising, given IOSCO's securities market bias, the lead time for organizing the conference panels and the high level, prepared speech approach that typifies the conference presentations. (This is not to say that the CFTC's foreign terminals rulemaking went unnoticed; it did generate some informal discussions, principally among exchange representatives, that could be overheard during conference breaks.)
G-7 Forum
The conference panel on financial stability was one of the more interesting and informative panels. It highlighted the recently-formed G-7 Forum for Financial Stability, which is comprised of central banks, financial market regulators, international financial institutions and international regulatory groups, including IOSCO. As described by Andrew Crockett, chairman of the forum and a conference panelist, the forum was created to address vulnerabilities in the global financial system and to improve coordination and exchange of information among the financial authorities responsible for financial stability. The forum, which met for the first time in Washington, DC on April 14, is undertaking a number of specific projects, several through ad hoc working groups
IOSCO plans to participate actively in two of the forum's working groups. The first, chaired by Howard Davies, chairman of the U.K. Financial Services Authority, will develop recommendations for reducing the potential destabilizing effects of highly leveraged transactions by institutions on financial markets. The second working group, chaired by John Palmer, superintendent of financial institutions in Canada, will evaluate the impact of the use of offshore financial centers by market participants on global financial markets.
The composition of the forum illustrates the truism that global financial issues often cut across regulatory boundaries as well as national boundaries. IOSCO's participation in the forum continues its trend in recent years of collaborating with other international organizations of government regulators to tackle cross-sector issues. IOSCO's work through the Joint Forum on Financial Conglomerates, which it formed with the Basle Committee on Banking Supervision and the International Association of Insurance Supervisors, is an earlier example.
Investor Education
Investor education emerged as a hot topic of discussion at the conference, with SEC Chairman Levitt and others strongly pushing for greater investor education. The problem is framed not as a dearth of information, but rather as a glut of information. That glut threatens to overwhelm investors who lack an educated understanding of the markets to enable them to ask the right questions and evaluate their investment choices. The solution is seen as involving a partnership between government and the private sector, but little guidance was offered at the conference on what role its advocates envision for the private sector.
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IOSCO Looks At Electronic Trading
Working Party 2 of IOSCO's Technical Committee is currently conducting a survey on screen-based trading systems for derivatives markets. The survey is in two parts: one relates to exchange information and the other relates to regulatory approaches in the jurisdictions to be surveyed. Those jurisdictions of the Working Party as well as any attendees of the Burgenstock/Boca Raton meetings who volunteer to provide responses.
Among other things, the survey asks respondents to discuss commercial structure, linkages and access arrangements, exchange self-regulatory requirements and risks and concerns. In addition to requesting descriptions of regulatory structure and approaches, it also requests each jurisdiction to address areas where it believes that the existing IOSCO "Principles for Screen-based Trading Systems" should be updated.
The Working Party is in the process of collecting and collating responses and anticipates that further discussions will be held on how to proceed and to use the survey responses when the completed responses are summarized. -- Andrea Corcoran, director of international affairs, Commodity Futures Trading Commission.
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Behind Closed Doors
The more noteworthy activities at the IOSCO annual events typically take place during the private meetings of the government regulators who form IOSCO's core membership, when they finalize their work on the various reports they have timed for release at the conference. This year was no different. IOSCO publicly announced the completion of several final reports by the Technical and Emerging Markets Committees. These reports (which are available through the IOSCO Web site) include, among others:
- A report by the Technical Committee on "Supervisory Framework for Markets." This report offers guidance to regulators on the design of market oversight and surveillance programs (with a decidedly securities market bias) and follows up on the IOSCO "Objectives and Principles of Securities Regulation" published in September 1998.
- A report by the Technical Committee on "Recognising a Firm's Internal Market Risk Model for the Purposes of Calculating Required Regulatory Capital: Guidance to Supervisors." This report offers guidance on the use of "value at risk" models and builds upon the Technical Committee's May 1998 report on "Methodologies for Determining Capital Standards for Internationally Active Securities Firms Which Permit the Use of Models Under Prescribed Conditions."
- Working Party 2 of the Technical Committee is considering whether or not to update the 1990 IOSCO guidelines on electronic trading systems. They sent surveys to exchanges with electronic trading platforms, including exchanges in the U.S., Australia, and other jurisdictions (see IOSCO Studies Electronic Trading).
Committee Work
The IOSCO Consultative Committee, comprised of over 60 futures exchanges, securities exchanges and other futures and securities industry SROs, is continuing its efforts to raise its profile within IOSCO as a true advisory committee to the Technical and Emerging Markets Committees, with valuable input to offer the regulators. The Consultative Committee is currently engaged in two major initiatives.
First, under the leadership of the National Futures Association, the Committee is preparing a report on "Models for Effective Self-Regulation." This report will cover the use, value rkd efficiencies of self-regulation for both futures and securities markets and will develop general principles for effective self-regulation. Last year, 14 members of the Committee from over 10 countries met in London for a day long kick-off meeting to exchange ideas and adopt a project outline. Committee members are reviewing a first draft of the report, which was circulated at the Committee's annual meeting during the conference. Once a new draft is prepared based on comments received, interested members will meet to finalize the report. The Consultative Committee expects to finish this report by year-end.
The second project, which the Committee endorsed last month, is to develop international proficiency standards for financial intermediaries. The focus is on the qualification and licensing of salespersons at financial intermediary firms who are engaged in solicitation of customer business. The project includes three stages: surveying existing proficiency standards and practices in different markets; categorizing major proficiency models in use; and identifying the proficiency standards and practices that best contribute to healthy markets and investor confidence. The Committee expects to complete its report by the IOSCO annual meetings in Sydney, Australia, scheduled for the week of May 14, 2000.
Finally, the IOSCO Presidents' Committee approved relocation of the IOSCO General Secretariat from Montreal to Madrid.
Kathryn M. Trkla is senior vice president and associate general counsel of the Chicago Board of Trade.
