Securities regulators around the world are ramping up their oversight of systemic risk, but there’s more to be done, says a review by the International Organization of Securities Commissions (IOSCO).
In the wake of the global financial crisis, IOSCO adopted two new principles that aimed to answer concerns that regulatory requirements and frameworks did not adequately address securities market risks, and the need for regulators to play a role in addressing systemic risks and maintaining financial stability. On Monday, it published a review of regulators efforts so far to adopt those principles, which found that the 31 jurisdictions participating in the review (including the regulators from Alberta, Ontario and Quebec) have “made significant efforts” to implement these new principles.
It reports overall “good progress in developing processes and procedures to identify systemic risks”; but that there needs to be more work done to develop processes to manage and mitigate those risks.
It also found that many jurisdictions have developed processes to review the limits of their responsibilities, the so-called “regulatory perimeter”; although in many cases those efforts are informal, rather than formal. It says that regulators could “better articulate their responsibilities, powers and objectives”. Additionally, the report makes 10 recommendations designed to help regulators develop and embed systemic risk and regulatory perimeter review processes.
For Canada in particular, the report notes that a number of the provincial securities regulators have put in place processes, such as multi-disciplinary internal teams and committees, to be in a better position to identify and monitor risks (including systemic risk). The Canadian Securities Administrators (CSA) has also formed a systemic risk committee, which meets on a regular basis to discuss potential financial stability risks related to securities markets and potential regulatory gaps. And, they are in regular dialogue with federal prudential regulators, the central bank, and the federal Department of Finance regarding the stability of the financial system.
The ability of securities regulators to monitor and manage systemic risk is one of the issues at the core of the latest federal effort to develop a national regulator, after the Supreme Court of Canada ruled that most securities regulation comes under provincial jurisdiction, but that systemic risk is one area that may be considered a national concern. The recently-announced deal between BC, Ontario and the feds includes a plan for new federal legislation to deal with systemic risk, among other potential national issues.
The IOSCO report also notes that Canada’s Heads of Agencies serves as a coordinating mechanism for financial regulators that allows federal authorities and provincial securities regulators to cooperate on issues that cross the regulatory perimeter.
And, it says that, in Canada, a number of different techniques and criteria are used in monitoring the perimeter of regulation, including: staff committees with specific areas of expertise to monitor market developments and product innovation; compliance sweeps to better understand and identify novel developments and potential emerging regulatory issues; internal emerging risk committees; reviewing new rules after they have been implemented to assess whether they need to be revised; and, reviewing exemptive relief applications to identify any new trends.
“This report will help members in designing and refining the processes they have about systemic risk and keeping the regulatory perimeter under review. It will give the granularity our standards need to be useful, relevant and implemented,” said IOSCO chair, Greg Medcraft.
“The recommendations about culture and resourcing are particularly important. They highlight the importance of raising awareness of arrangements relating to systemic risk and regulatory perimeter review. We need to encourage the professional skepticism needed to ensure those arrangements are used in a meaningful and constructive way,” he added.
The review was undertaken by a team led by the Netherlands, and consisted of representatives from the securities commissions of Australia, France, India, Japan, Luxembourg, the UK, the U.S., and the IOSCO general secretariat.