IOSCO's Response to the Financial Crisis

I. INTRODUCTION The International Organization of Securities Commissions (IOSCO) was transformed in 1983 from an inter-American regional association of securities regulators into an international body.1 It is now an association of securities commissions and main financial regulators for more than 100 countries that regulate more than 90% of the world's securities markets. IOSCO's primary role is to promote high standards of securities regulation and to act as a forum for national regulators to cooperate with one another.2 Like other international financial bodies, IOSCO has responded to the financial crisis of 2008. Previously, in response to the Asian financial crisis of 1998, IOSCO developed its Objectives and Principles of Securities Regulation to establish a framework for the regulation of securities markets, intermediaries, securities issuers, and collective investment schemes.3 Ten years later, IOSCO determined that its objectives and principles were not designed to prevent systemic risk and were therefore insufficient.4 IOSCO thus revised its objectives and principles and added eight new principles, including two that specifically focused on systemic risk.5 IOSCO's ongoing efforts to support these new Principles are parallel to efforts by other financial regulators to deal with systemic risk. Yet, IOSCO's efforts focus on somewhat different issues in the capital markets than the issues of interest to bank regulators. Systemic risk in the securities markets is not primarily about prudential regulation. Rather, it concerns activities by non-banking intermediaries, sometimes referred to as the shadow banking sector,6 transparency and soundness in the capital markets, trading practices, and risks from market innovations. The risks posed by these intermediaries are in some ways more subtle and difficult to understand and control than the risks posed by too-big-to-fail banks. Further, in a number of the areas in which IOSCO is attempting to set standards, the United States and the European Union have taken some divergent regulatory paths, and Asian markets may be engaging in competitive regulatory strategies that pose a threat to established markets in the United States and Europe. Part II of this Article will outline IOSCO's Objectives and Principles and explain how IOSCO revised them in response to the financial crisis of 2008.7 Part III will discuss certain key initiatives where a lack of harmonization would be detrimental to effective regulation.8 In particular, this Part will focus on the regulation of hedge funds, credit rating agencies, short selling, and technological innovations, including direct electronic access, dark pools, and high frequency trading.9 These topics have been selected because they are not within the traditional purview of bank regulators and are securities regulatory concerns related to systemic risk in the capital markets. Part IV will discuss IOSCO'S role in the international harmonization process and whether IOSCO can successfully raise standards in these controversial areas in the face of political pressure from market players and competition between capital market centers.10 This Article concludes that IOSCO's harmonization efforts tend to be at a level of generality that may be an insufficient prod to regulatory reform. When national interests are at stake, securities regulators follow those interests rather than IOSCO directives. Since IOSCO has no enforcement mechanisms aside from peer pressure, and its members are so numerous and varied, it is unrealistic to expect rigorous and detailed harmonization of new standards of conduct or regulation. Nevertheless, IOSCO can play a useful role in highlighting critical emerging areas where securities regulation is in need of reform, and it has done so with regard to a number of systemic risk issues in the trading markets. II. IOSCO'S OBJECTIVES AND PRINCIPLES The IOSCO principles report of June 2010 sets forth three objectives of securities regulation. …