The Securities Industry and Financial Markets Association has released a study into systemic risk regulation that examines how regulators may be able to do a better job of monitoring overall risks.

In the wake of the financial crisis, regulators and policymakers around the world have woken up to the need for better monitoring of systemic risks. Last week, at its annual conference in Montreal, the International Organization of Securities Commissions adopted a couple of new principles for its members to follow that focus on systemic risk.


The new study from SIFMA, produced along with Deloitte & Touche, is based on interviews with 22 organizations, including regulators, commercial and investment banks, insurers, hedge funds, exchanges, and industry utilities. It focuses on how they define systemic risk, and specifically identifies what type of information and data regulators would require from large, interconnected financial institutions to effectively monitor systemic risks.

The study highlights eight different potential systemic risk information approaches that a regulator could use in to monitor and understand potential systemic risks. It finds that there is not a single ideal approach, and the various approaches may work best when used together. There were varied opinions as to which would be the most effective.

Among other things, it also finds that reporting should reflect the difference between normal market conditions and periods of market stress when frequent reporting is necessary. The study also looks at current reporting metrics and aims to identify key gaps in current reporting systems.

It notes that current reporting metrics focus on the soundness of individual firms and do not effectively capture all of the drivers of broader sources of risk, but they do capture parts of the information needed to monitor systemic risk. The study reports that systemic risk builds up over time, influenced by drivers which are distinct from factors which create risk in individual firms.

SIFMA says it believes developing the right information structure for tracking systemic risk can play a major role in the ability of the firms and regulators to identify and address potential problems before they escalate.

“SIFMA strongly supports the creation of a tough, competent systemic risk regulator to oversee systemically important firms so that the activities of one or a few firms will not threaten the stability of the entire financial system,” said Tim Ryan, president and CEO of SIFMA. “With this study, we offer important insights into the development of a systemic risk regulation regime, which we hope will be useful to the regulatory community as it works to expand its monitoring of systemic risk and better understand the inter-connected risks between systemically important institutions.”

IE