IOSCO identifies core market risks, including crypto assets and advanced tech – IIAC CEO

An open letter from Ian Russell, president and CEO of Investment Industry Association of Canada (IIAC) provides a perspective on risks in global capital markets, the priorities for further reform, and a focus on the key challenges at play. This perspective was drawn from the International Council of Securities Associations (ICSA) interim Meeting held November 7, and meetings with the chair of the Fixed Income Currencies and Commodities Markets Standards Board (FMSB), Mark Yallop, and individual financial executives in London on November 8-9.

The International Organization of Securities Commissions (IOSCO) has identified core risks in global markets over the coming year. These include:

  • Risks associated with evolving developments in the crypto-asset marketplace. IOSCO noted that many members have observed a notable increase in firms offering retail OTC leveraged products with a cryptocurrency underlying. Also, the distribution of cryptocurrencies across jurisdictions via online platforms poses a significant risk to investor protection;
  • Concerns about secondary bond market liquidity in stressed market conditions;
  • The concentration of ETF assets in institutional portfolios and systemic implications from significant financial shocks;
  • The unintended impacts from recent regulatory reforms; and
  • Lack of cross-border resolution in several areas, including information sharing, coordination and planning on how cross-border resolution for global systemically important banks (G-SIBs) would be conducted, and crisis management for systemic nonbank intermediaries, such as insurers and central counterparties (CCPs).

IOSCO priorities and concerns

IOSCO has structured several workstreams to address these perceived risks. A high priority for IOSCO, in conjunction with the Financial Stability Board (FSB), is the monitoring and assessment of concentrated ETF holdings with asset managers, the stability of bond market liquidity in response to stressed conditions, and leveraged balance sheets at non-bank intermediaries.

IOSCO is reviewing technology applications, such as digital ledger technology for trading and clearing, and artificial intelligence and machine learning (algorithms), to better understand the benefits and risks of their applications in regulatory compliance and the need to balance innovation with preserving a competitive playing field for market participants.

The management and sharing of financial data is a key concern, given strict new privacy laws in the EU (i.e. the General Data Protection Regulation or GDPR). This law is of particular concern to IOSCO given the successful information sharing arrangement under the Memorandum of Understanding regime. This regime has proven important to facilitate cross-border enforcement. IOSCO is working with the EU authorities to find an acceptable arrangement compatible with the prevailing GDPR.

The reliance on outsourcing, particularly technological expertise, has increased considerably in recent years, in front and middle-office, as well as back-office operations. For the coming year, IOSCO is focused on global risks, including corporate bond liquidity in stressed markets, ETF holdings at asset managers, cybersecurity, outsourcing, and cryptocurrencies.

Read the full letter

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