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REGULATORY ISSUES IN EMERGING MARKETS

Keeping the playing field level

Interview - April 14, 2015

David Wright, a featured speaker at this year’s World Exchange Congress, had a long and distinguished career in the European Commission before taking up his current post as Secretary General of IOSCO in 2012. As the EC’s Deputy Director General for securities and financial markets, he helped design the plans to integrate the European Union's capital and financial services markets, he was later a member of the EC's Task Force on Greece. Today, as head of the organization which groups securities regulators in more than 100 countries, he has a privileged view of the issues facing financial markets and investors worldside. David Wright spoke to The Worldfolio about some of them: the rise of off-exchange trading; cyber crime; investor education; and the erosion of faith in financial markets that has come with the current crisis.

DAVID WRIGHT, SECRETARY GENERAL OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS (IOSCO)
DAVID WRIGHT | SECRETARY GENERAL OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS (IOSCO)

 

The focus of this special edition of The Worldfolio is emerging and frontier markets. The economies of these markets are all very different but, from a regulatory point of view, are there issues that are common to them all?

I think the first thing is that, very encouragingly, all the emerging market countries that I have talked to know that, no matter how poor or emerging they are, they have to develop their domestic capital markets.

This crisis, and events before and since, I think have convinced all of these countries that they can no longer rely on the ebbs and flows of international capi-tal from global financial institutions and that they have to intermediate their own savings and investments with their own stock exchanges and their own capital markets. This is a seminal moment in a way, a moment when IOSCO and others have got to step up and support and help these countries to develop their capital markets, which is what we are intending and trying to do.

Now, the regulatory issues. Of course, every market has its own culture and every country has its own ways of doing things. But I think the basic principles of capital markets and the IOSCO principles are the accepted set of standards for all securities markets; the fundamentals of markets — protecting investors, making sure that information is supplied to everybody, the principles of fairness and transparency — they apply everywhere.

In a 2012 speech to the Atlantic Council, you proposed the idea of a global regulatory agency based upon the notion that all the markets are interconnected in one way or another. Certainly the crisis has proved that. Has that idea moved forward at all? Have you had any more reaction to it?

What people say in private and what people say in public are two different things. I talk privately to many people from many different jurisdictions and they see the logic of what I said there. And the logic is simple, it is that in an interconnected world, with more and more big capital markets, unless you have some discipline in the implementation of a rule, then we are going to end up in a very complex matrix in which the number of interpretations and the number of the number of countries is going to proliferate. And you are not going to be able to solve those problems on a bilateral basis, you are going to need some form of collective discipline.

Now, if there is insufficient political support for strengthening the global institutions in a legal way, what can you do? Number one: the international standards setters, like IOSCO, in the areas that we have to work in and clearly in global areas, we have to act upstream quickly, we have to set the upstream principle. Step two is that all the jurisdictions, having agreed to those principles, would then agree to cooperate in the implementation and interpretation of those principles. That is before step three: before anybody picks up a red pen and starts writing a law.

What would you say are the most pressing issues right now for IOSCO?

I think there are a number of them. One is certainly to build capacity to help emerging market countries develop their capital markets and securities markets. Also, these cross border issues we have just been talking about. Improving our understanding of risks and vulnerabilities of securities markets; we still have a very, very imperfect understanding of how, for example, so called “shadow-banking” functions.

I would say securitization. I think many people feel we need to improve and help the emergence of new forms of market-based financing. And that would be certainly one of them.

Our work on enforcement. IOSCO has a remarkable instrument here called the Multilateral Memorandum of Understanding, which has got over 103 countries signed up, on mutually helping each other on enforcement. The whole area of benchmarking is incredibly important because we have seen very serious damage by the manipulation of benchmarks and we have to put this right. If you don’t have trust in the basic numbers of financial markets, they will be working sub-optimally. And if you look at the surveys of lack of trust in the financial industry, it is almost rock bottom today.

Two other issues which are high on our agenda are cyber resilience, cyber crime; a lot of people are very worried about this and how it can affect markets, participants in markets and so forth. And the other one is the quality of audits in general of companies who are listed.

Interestingly, the IOSCO report on cyber-crime said that 53 percent of the members of the World Federation of Exchanges had experienced some sort of hacking incident, but that there wasn’t necessarily a financial motive behind them.

I think the motives are very different here; they can be financial or other that want to disrupt the global financial system; it can be political, it could come from North Korea or it can be for personal gain in a financial sense or from anti-capitalist tree dwellers.

Now, we were the first of the standard setters, I think, to start taking this subject very seriously and the work we did with the World Federation of Exchanges I think was pretty exemplary in that respect. There are implications for enforcement, implications of exchanging information, implications for intermediaries. Almost every IOSCO committee we have is looking at how we can possibly cooperate more on subjects like this. And you are not going to be able to solve those problems on a bilateral basis, you are going to need some form of collective discipline.

“Dark pools” of off-exchange securities trading and high-frequency trading have been big issues during the past year. The SEC recently leveled its biggest fine ever, this one against UBS, for the manner in which it operated a “dark pool.” How can regulators protect investors in these venues?

I don’t think anybody sees necessarily a problem with trading off-exchange, crossing networks, multilateral trade platforms, whatever they are; but they have to treat everybody fairly and the rules have to be clear and non-discriminatory. It is also important for the whole of the market that this trading is disclosed to regulators, so consolidated tapes can be put together as they are in the U.S., to disclose all the trading to the market; that has not yet happened in Europe.

So per se, I don’t have an issue with that, but I do have an issue if there is discriminatory trading or non-transparent trading and so forth. Trading has to be fair and transparent, if it is not then I have a serious problem with any system that does not have those characteristics.

I worry about incentives in a system which helps an asset manager to get privileged access or an investment firm to be able to get better conditions; it has got to be fair to everybody, including and most importantly, to retail investors; their savings and pensions are tied up in all of this.

Anything that is unfair, privileged or conflicted is not acceptable as far as I am concerned. The basic fundamental public interest principles of the securities market have got to be applied and I don’t really care who does it, that is irrelevant, but it has got to fulfill those conditions. And that is the job of regulators, to make sure that these markets function according to the principles and rules that are fundamental to securities markets. Otherwise, we will simply see that if investors lose faith in the benchmarks of a market or the types of trading in a market, then they will just not invest, they will just buy houses, and that isn’t good for the economy.

Investor education is a big issue for IOSCO. Where do you think this should begin?

In school, in primary school. We have to teach children about money, teach them what it is. You learn Latin, cooking, gymnastics at school, but we don’t learn about a fundamental part of our lives, which is money and how finance works. We can’t expect investors to make good decisions in their lives if they don’t know anything about money and finance. You have a biased asymmetric information system here. In other words, all of the information is with the supply side. The ordinary consumer, by and large — and all the surveys show this — knows next to nothing. We have seen endless examples of consumers being ripped off, legacy bonds sold to aging grandmothers and all sorts of packaged up insurance products, bundled with bank loans, mis-selling of multiple forms.

Now, you are never going to solve all these problems by educating, but you’ll do better. Along with that, we need Draconian sanctions for all those who mis-sell and defraud. And that, for me, means jail. It is very simple: anybody who deliberately mis-sells products to a retail investor should spend time reflecting in a fairly cold, dark, damp cell about the evil they have committed, because what they do is ruin people’s lives.

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