Global securities regulators have flagged the low-interest rate environment as the top systemic risk facing securities markets in the year ahead.
The International Organization of Securities Commissions (IOSCO) has published its first-ever risk outlook report, which the aims to identify important trends, vulnerabilities, and risks, in securities markets that may represent systemic concerns. Leading its list of the top threats is risks related to low interest rate environment.
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD426.pdf
“Expansionary monetary policies have reduced interest rates to the point that real rates are at times negative. While these policies may help stimulate the real economy, spill-over effects may create potential risks for securities markets,” it says, adding that the search for yield is turning investors towards leverage products, such as collateralized debt obligations (CDOs) and leveraged real estate investment funds.
Additionally, the report points to risks related to collateral management, amid increased demand for high-quality collateral, which has altered the balance of collateral in the system, and could impact pricing, it says. It also notes that reforms to over-the-counter (OTC) derivatives markets also pose possible systemic risks. While reforms such as, requiring mandatory clearing of derivative contracts through central counterparties (CCPs), are designed to reduce counterparty risk; it cautions that “shifting the risk from bilateral OTC contracts to a single point of infrastructure is a challenging balancing act.”
Finally, it notes that there are risks related to the capital flows of emerging markets, where debt securities and non-bank lending have overtaken foreign direct investment and bank lending as the main source of these capital inflows.
IOSCO says that the report, a joint effort between the IOSCO research department and the Committee on Emerging Risks (which is comprised of senior researchers, chief economists and risk officers of almost 30 securities markets regulators from around the world), is the first edition of what will be an annual series. “Its aim is to provide IOSCO members with the information they need to adopt a forward looking approach in dealing with potential vulnerabilities and risks to global securities markets and the global financial system as a whole,” it says.
“I would urge all IOSCO members and policymakers globally to carefully reflect on the [report’s] observations and understand – and act on – the implications of the trends and risks it identifies for their markets, said IOSCO chair, Greg Medcraft.
Looking ahead, IOSCO said that it will publish reports on crowdfunding, corporate bond markets and incentive structures in supervision.