Although Canadian securities markets may not face the same problems as other markets around the world, Canada will not avoid being impacted by vast regulatory changes moving forward, a panel of regulators said on Tuesday.

Speaking at a securities conference in Toronto, the regulators said the recent market turmoil is prompting greater cooperation and more consistency among regulators around the world.

“There is absolutely no question that there is much more cooperation among securities regulators,” said James Turner, vice-chair of the Ontario Securities Commission.

As an example, the autumn ban on short selling by the Ontario Securities Commission was a result of similar bans by other international jurisdictions, said Turner. Since short selling of certain securities had been banned in the United States, he explained, the absence of a similar ban on the same inter-listed securities in the Canadian market would allow traders to escape the ban. Such “regulatory arbitrage” has become a significant issue, he said.

“You can’t have fundamentally different rules and approaches in different jurisdictions,” Turner said.

Such standardized regulations could prevail even in aspects of the market where Canada is fundamentally healthier than other countries.

The practice of short selling in Canada, for instance, is much stronger than that in the United States, according to Susan Wolburgh Jenah, president and CEO of the Investment Industry Regulatory Organization of Canada.

A recent IIROC study found that of the total number of failed trades in the market, failures attributed to naked short selling constituted a very small percentage.

“This has not changed in the past little while,” Wolburgh Jenah said.

The fact that many other markets have much higher failure rates means regulatory changes are likely at the international level, said Turner.

“There’s no question that international regulators looking at markets around the world have concerns in this area,” he said. “It ultimately may come back to us.”

Still, the panelists admitted that certain problems exist within short selling in Canada, including a lack of disclosure and insufficient monitoring. Turner noted that some Canadian regulators are participating in a task force of the International Organization of Securities Regulators that is currently examining the regulation of short selling.

Countries with regulations that are inconsistent with the rest of the international community could present problems, Turner added. “The European community is going off on their own with legislation that is going to be much more prescriptive than what a number of countries are going,” he said. “There’s obviously a very big concern about that.”

While international coordination is positive, Wolburgh Jenah warned that regulators must not be too impulsive in implementing new rules.

“It is so critical that we all stand back and take a deep breath, and ensure that if we’re going to unleash a whole lot of new regulation, that it’s properly focused,” she said.

The regulators agreed that one key issue likely to be addressed in the near future is the role of credit rating agencies.

The agencies currently operate under a significant conflict of interest, since they are paid by the issuers of the securities they rate, Wolburgh Jenah said. Until this conflict is addressed, these agencies will struggle to regain the confidence of investors, she said.

A key lesson from the collapse of the asset-backed commercial paper market is that credit ratings are not necessarily an effective resource on their own, added Wolburgh Jenah. “Reliance on credit ratings has to be combined with a good dollop of one’s own due diligence.”

IE