Interview: Greg Medcraft, IOSCO/ASIC

IOSCO: What’s in Store for 2016

Greg Medcraft, chairman of the International Organization of Securities Commissions and the Australian Securities and Investments Commission, discusses IOSCO’s work on data reporting and market conduct, challenges and opportunities in technology, and the efforts to address cross-border divergences

IQ: What are the key accomplishments of the International Organization of Securities Commissions (IOSCO) over the past year?
Greg Medcraft (GM): I would point to three achievements, in particular. First, finalising IOSCO’s 2020 strategy. This is a five-year strategic plan for IOSCO, which builds on our post-crisis work and expands our commitment to capacity building, broadens the scope of our risk-assessment capabilities, and deepens our involvement with other international standard-setting bodies. It is supported by a resourcing and funding plan. Second, publishing our report on credible deterrence. This report drew on the extensive experience of IOSCO’s members to identify the key elements that help ensure securities regulators’ enforcement activities credibly deter wrongdoing in the market-place. This is a valuable report that will assist our members tailor their deterrence strategies.

“There is no doubt that the implementation of derivatives reforms has been a challenge, and continues to be one. But the rationale for the changes is compelling and, once implementation is complete, they will do a great deal to foster financial stability”

Finally, redirecting the international work on asset management. As a result of IOSCO’s input, which brings with it the experiences and expertise of securities regulators, the discussion in this space shifted from how to designate certain asset managers as globally systemically important, towards better understanding the risks posed by the sector and properly tailoring any regulatory response, if any, to these risks. This was a positive development that acknowledged the specific characteristics of participants in financial markets, as compared to banks.

IQ: What are IOSCO’s priorities going into 2016?
GM: Over the next 12 months and into the future, I see the following developments as being very relevant to IOSCO and its members in meeting those strategic objectives: gatekeeper conduct; globalisation and the increasing interconnectedness in ever more globalised financial markets; structural change, the growth of market-based finance and its increasing importance as a funding source; complexity – in particular, the ongoing innovation-driven complexity in products, markets and technology; and digital disruption – in particular, the disruption to business models posed by the digital economy.

“The message from some emerging-market jurisdictions is that there needs to be a balance between ensuring effective regulation globally and tailoring approaches to the genuinely diverse needs and characteristics of different markets”

The IOSCO board has discussed addressing these challenges, and has given several workstreams priority. They are all about making sure we continue to meet IOSCO’s mission of building trust and confidence among investors, ensuring that fair, efficient and transparent markets continue to allocate capital efficiently to promote economic growth, and making sure systemic risk is mitigated.

On gatekeeper conduct, we will work to better understand and develop approaches to address conduct risk in professional and wholesale markets. On globalisation, we will work on finalising the IOSCO enhanced multilateral memorandum of understanding. Over time, this will better enable IOSCO members to help each other investigate misconduct that crosses borders. We will also develop our capacity building programmes to support our many members in growth and emerging markets in meeting the challenges of globalisation.

On structural change, we are looking at ways to encourage the use of capital markets as a means to fund infrastructure investment and small to medium enterprises. On innovation-driven complexity, we are continuing our work to better understand and address the systemic risks the asset management sector and central counterparties might pose, in collaboration with the Financial Stability Board (FSB).

Lastly, on digital disruption, we are finalising the preparation of a regulatory toolkit on cyber resilience, which is of ever-growing importance due to technological developments across financial markets. We are also working to understand the emerging risks and challenges posed by fintech developments as part of our emerging risk monitoring agenda.

IQ: Cross-border harmonisation of derivatives rules continues to weigh on the markets. Can you share your thoughts on how these issues might be resolved?
GM: We have made good progress, but still have some way to go. Issues remain between the US and European Union (EU), but each has dealt effectively with the rest of the world.

Meanwhile, the Committee on Payments and Market Infrastructures and IOSCO have been working to develop standards to ensure consistent data is reported under different national reporting regimes. This will help minimise compliance costs for firms by keeping global standards as similar as possible, and make the data aggregation task of regulators much easier.

The FSB has also recently published its first peer review on the implementation of the trade reporting obligation. This includes a number of recommendations designed to ensure a closer alignment of global trade reporting requirements.

There is no doubt that the implementation of derivatives reforms has been a challenge, and continues to be one. But the rationale for the changes is compelling and, once implementation is complete, they will do a great deal to foster financial stability.

IQ: Some countries, particularly those in the Asia-Pacific region, say their markets are different to the US and EU, and so will take a different route to implementing the Group of 20 derivatives regulatory reform commitments. As chairman of the Australian Securities and Investments Commission and IOSCO, how do you view these developments?
GM: I do not believe this is a regional issue, as such. Indeed, a number of jurisdictions in our region are well advanced in implementing derivatives reforms. Not unreasonably, it is the smaller, less developed markets where progress has not been as rapid. So it is more about a distinction between developed and less developed markets.

Overall, I think we all agree on the need to address the issues in derivatives markets, which came to light during the crisis. However, the message from some emerging-market jurisdictions is that there needs to be a balance between ensuring effective regulation globally and tailoring approaches to the genuinely diverse needs and characteristics of different markets. This includes taking a proportionate approach to risk, while also maintaining a level playing field globally.

IOSCO, which has a large and very active emerging markets membership base, is a forum where these issues are being discussed.

IQ: Bank of England governor and FSB chairman Mark Carney has voiced concerns that banking rules and regulations might in some instances be going too far and require attention. Do you share these concerns, and what areas do you believe might require specific attention?
GM: It is not really appropriate for me to comment on banking regulations. However, what I will say is that there is a clear need for us to work together to ensure we understand the collective impact of the regulations we develop. We are getting better at doing this across sectors and intend to keep getting better.

IQ: Both you and Mark Carney have talked about the need for financial markets to regain trust and confidence. How much progress do you think has been made in this regard, and what remains to be done?
GM: I think there have been some steps taken on this, but more needs to be done to win back public trust in financial institutions. Concerns about conduct risk and how it is being managed have been a primary driver of quite a bit of IOSCO work. This includes the credible deterrence report that I mentioned earlier, our work on financial markets benchmarks, and our current workstream looking at market conduct and the tools our members have to regulate it.

But this is really something the industry needs to take ownership of. Firms need to honestly examine the culture and incentives they have in place, and ask ‘how do we make sure we are promoting good conduct and deterring misconduct throughout the organisation?’. And, of course, the lead here needs to come from the very top.

“Firms need to honestly examine the culture and incentives they have in place, and ask ‘how do we make sure we are promoting good conduct and deterring misconduct throughout the organisation?’”

IQ: The impact of new technologies on the financial markets is also being widely discussed today. In what areas do you see the potential for significant change?
GM: Technological change is, in many ways, nothing new in financial markets. But, at present, we are definitely seeing a very rapid rate of change. I see this as something that may affect all categories of financial service and the firms that provide them. Of course, digital disruption presents both opportunities and challenges, both for industry and for regulators.

Key issues we are looking at in IOSCO include crowd funding, which is becoming an important platform for some companies to raise capital, and cyber resilience. The latter point is becoming ever more vital for providers of financial market infrastructure, in particular.

More generally, we have already seen innovations like peer-to-peer lending and robo-advice starting to gain acceptance in the market-place. However, a technology like blockchain certainly has the potential to be transformative in how we transact. Again, this presents both opportunities and challenges to incumbent firms.

In all these cases, the role of regulators is to work to ensure we meet our regulatory goals, while creating an environment where innovation is fostered rather than stifled.

IQ: Both market participants and some regulators have expressed concern about the decline and dearth of market liquidity. How concerned are you and the global regulatory community about liquidity, and what steps can and should be taken to address it?
GM: As with all risks and issues, we need to monitor liquidity in the market. There are obviously reasonable concerns about liquidity, which have been well documented. However, we need to be smart about how we go about addressing the issue, making sure we collect the facts, do the analysis and tailor any regulatory responses to the real issues. To this end, IOSCO has started work on analysing liquidity in the corporate bond market to look into what the problems might be, and then will consider any solutions.

Not to pre-empt the outcome of this work, there may be some possible, measured responses we could consider on liquidity. For example, market infrastructure providers may be able to use technology more effectively to improve market access and boost post-trade transparency. In addition, issuers could look to standardise documentation to attract investors by reducing the complexity of required due diligence. Facilitating cross-border issuance and investment could also improve liquidity, as could – potentially – banks moving from a market-maker or principal-trading approach to more of an agency approach.

In any event, we believe market regulators are well placed to monitor market liquidity, as well as other emerging risks, and act accordingly.

“IOSCO has started work on analysing liquidity in the corporate bond market to look into what the problems might be, and then will consider any solutions”

IQ: International harmonisation of data and reporting is another focal point for IOSCO and CPMI. What can we expect to see in this area in 2016?
GM: You are right that this is a key area for us, and the work of the CPMI-IOSCO data harmonisation group continues to progress well. As you know, the group launched a public consultation on the unique trade identifier (UTI) in August. It also commenced a consultation on the harmonisation of a first batch of key data elements in September. So there has clearly been quite a lot going on. The group aims to publish guidance on the UTI and the unique product identifier in 2016. It is also preparing for two further public consultations on harmonisation of the remaining key data elements. These are expected to take place later this year and early next. The target is to publish guidance on all data elements by 2017.