IOSCO Part II discusses some of the key agendas which might be the focus for IOSCO in the coming years and some of the obstacles to achieving those agendas that it might face.  Before discussing what research and policy agendas IOSCO might prioritise one has to acknowledge the two base issues of: 1) money; and 2) the prevailing political economy in which IOSCO must operate, that can both facilitate and/or obstruct IOSCO’s activities.

Taking money first, a key issue for IOSCO is its level of operating resources and its ability to lessen its dependence upon the goodwill and seconded resources of individual member organisations, this is especially important in terms of ramping up the independence element of IOSCO’s research capacity.  For example IOSCO’s 2010 Annual Report revealed that of its total revenues of €2,200,000, €1,900,000 was raised from member contributions.  Historically member subscriptions have been at a flat rate of €15,000 per member, but from 2012 member fees will reflect the scale of a member country’s capital markets and will be calculated according to income per capita and GDP.  It is not yet clear how this will translate to IOSCO’s bottom financial line but IOSCO views this as a more equitable arrangement and expects that it will actually increase the size of the operational budget. 

Another indicator that IOSCO seems to want to leverage its capacity both in terms of research and its ability to provide technical assistance to its members, especially in emerging markets, is the very active consideration being given to establishing a new foundation which would seek to raise external capital to augment IOSCO’s revenue from membership fees.  Improvements in both research capacity and the technical regulatory capability of emerging markets might reasonably be expected to make a positive contribution to facing the challenges posed by systemic risk in contemporary financial markets.  It is quite possible that an IOSCO Foundation will either commence or have recently commenced operation in the period that ASIC’s chairman Mr Greg Medcraft is chair of IOSCO and this will likely provide increased opportunities for IOSCO to direct specific research programmes.

However, to date IOSCO’s Technical Committee has been the prime driver in its development of regulatory policy.  Unsurprisingly membership of the Technical Committee has been dominated by the larger national economies with more sophisticated and developed finance sectors, thereby reflecting the character of the global securities markets which IOSCO not only represents, but also is seeking to influence in terms of regulatory standard setting.  It is a moot point as to whether increased revenues, whether in the form of larger membership fee totals, and/or Foundation-auspiced revenue streams, will alter significantly this operational reality for IOSCO, even though from 2012 onwards the Technical Committee, the Executive Committee and the Emerging Markets Committee are being merged into a new IOSCO Board structure.

The second key base issue is IOSCO’s prevailing political economy.  IOSCO has no substantive enforcement processes, relying essentially on peer pressure and a consensual approach.  However, the dissonance and national interest priorities that inevitably have permeated the interactions of IOSCO members over the years seem to be becoming more openly acknowledged by the organisation.  For example, the 37^th IOSCO Annual Conference held in Beijing in May 2012 saw a significant development when it approved a resolution that permitted it to engage in stronger measures to promote compliance from its own members who are yet to sign the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMoU), originally agreed to in 2002.  The 2012 Beijing resolution aims to facilitate non-signatory members remove blockages in gaining support from their governments and subsequently implement the regulatory and statutory changes that are necessary for compliance with the MMoU.  Nevertheless, the harsh reality is that national economic self-interest exerted through domestic political pressure is more likely to hold sway over a domestic securities regulator than any IOSCO initiative promoting for example harmonisation or enforcement cooperation.  It is perhaps unwise to expect otherwise and it is through this realpolitik prism that one must evaluate IOSCO agendas for future activity.

As stated in Part I IOSCO has produced literally hundreds of substantive public documents that analyse and make recommendations on various aspects of securities markets.  These analyses and IOSCO’s ongoing priority agendas are motivated by concerns for IOSCO’s 38 Principles of Securities Regulation which IOSCO sub-divides as relating to nine categories: regulators; self-regulation; enforcement; cooperation; issuers; auditors, credit ratings agencies and other information service providers; collective investment schemes; market intermediaries; and secondary markets.  However, perhaps the most pressing concerns for IOSCO at the present time are: first, systemic risk in the wake of the Global Financial Crisis (GFC) and current Eurozone problems, especially in Greece and Spain; and second, what should be the scope of the regulatory perimeter.  These concerns prompted IOSCO to adopt two new principles on identifying, assessing and mitigating systemic risk and its 2011 Discussion Paper Mitigating Systemic Risk – A Role for Securities Regulators is likely to be highly influential in shaping IOSCO’s work agendas in the coming years.

In producing the 2011 Paper IOSCO of course took note of the effects of specific national statutory and institutional responses to the GFC such as the Wall Street Reform and Consumer Protection Act 2010 and Financial Stability Oversight Council (FSOC) in the US, as well as international regulatory developments such as those under the auspices of the G20.  Indeed in its media release at the opening of 2012 Annual Conference in Beijing (IOSCO/MR08/2012), IOSCO announced that being “prepared to respond to requests for project work by the G20 and the Financial Stability Board (FSB)”, was one of its four immediate priorities along with: providing the lead in the development of regulatory standards for capital markets; identifying emerging securities markets risks; and meeting the needs of its members.  So, it is probably reasonable to expect that IOSCO’s priority research agendas will target potential sources of systemic risk, especially from an emerging markets perspective.

So what specific issues and activities are likely to be under the IOSCO spotlight in 2012 and beyond?  At the top of the priorities list is likely to be the issue of financial stability, which is of course shaped by many inter-connected and inter-dependent factors.  This is not an exhaustive list but key potential vulnerabilities and therefore foci for IOSCO attention include: risks in over-the-counter (OTC) markets; conflict management; non-bank financial institutions; increasing complexity and innovation in financial products; cyclicality issues especially propensities for pro-cyclicality; capital requirements and prudential standards; and size of risk elements in financial markets.  The combined negative externalities wrought by these factors before, during and since the GFC, (assuming that the GFC has indeed ended and some would argue that it has not), have added urgency to the work of IOSCO and other multi-lateral actors such as the Bank for International Settlements (BIS), the FSB and the IMF to improve their definition and measurement of systemic risk.  Building on this are ongoing efforts to develop stress indicators and risk maps, which include specific studies of factors such as: contagion mechanisms; shadow banking; counterparty exposure; credit ratings agencies; herd effects; information asymmetry; prudential and governance requirements and oversight; remuneration practices; leverage; liquidity problems including the potential negative impacts of dark pools of capital; imbalances in settlement regimes; transparency and disclosure issues; effects of high-frequency or algorithmic trading; and moral hazard.

So a wide array of issues present for IOSCO to explore and it is likely to engage in both qualitative and quantitative approaches as it seeks to calibrate its systemic risk measures in practical contexts.  However, IOSCO’s capabilities to research and chart all these areas will inevitably be constrained by time and resource issues.  Also it may encounter legal or other structural impediments to data collection and information sharing with regard to both public and private sector actors.  Nevertheless IOSCO has begun taking steps to increase the scale and impact of its research efforts.  It has set up a new Standing Committee on Risk and Research comprising experts from securities regulators from the major markets, (therefore similar in character to how its Technical Committee has operated in the past) and a Research Department which will prepare annually from 2012 a Global Securities Regulation Risk Outlook.  However, the Research Department will face the ongoing dilemma of how independent it can expect to be, and how independent it will be perceived to be, from those same major securities regulators, especially given the likelihood of at least some level of data dependence.  Some who have criticised IOSCO in the past would likely be pessimistic.  For example, Underhill and Zhang (2008), argue that IOSCO is one of several multi-lateral regulatory actors in the finance sector that have been more instruments of private interest than the public good.  Nevertheless, one has to give these new IOSCO initiatives a chance and they may indeed signal a change in emphasis.  One must wait and see whether a post-GFC world provides additional scope for manoeuvre to an organisation such as IOSCO to secure public good goals a higher priority in the evolution and application of international standard setting in the finance sector.