Business

Saturday November 7, 2009

Lessons from global crisis

By ERROL OH


THE global financial crisis has been a rough and awful period for many people, businesses and governments, but as with all bad experiences, there are worthwhile lessons to extract. Among those who have much to gain from studying the missteps and flaws that have led to the crisis are the capital market regulators.

The International Organisation of Securities Commissions (Iosco) has issued many statements and reports since the subprime troubles erupted in late 2007, but if you twist his arm, secretary-general Greg Tanzer will single out a thing or two that the Madrid-based body has learnt from the crisis.

“I guess it would be that systemic risks can emerge from unlikely sources, and from Iosco’s perspective, that we, as a grouping of market regulators, need to consider how we can contribute in mitigating such risks, particularly because the markets are sort of the transmission mechanism for these risks,” he told StarBizWeek.

“So there’s a key need for us to consider more deeply what tangible steps we can take to try and identify risks that are emerging in the markets and consider what we should do as a group to mitigate them.”

Cooperation in dealing with a financial crisis is also crucial regionally and locally... GREG TANZER

In a June 2009 report, Iosco says systemic risk includes both micro-prudential issues (related to the financial soundness of market intermediaries) and macro-prudential issues (that is, stability of the financial system as a whole).

Indeed, the vulnerability of financial systems are uppermost in the minds of those overseeing the capital markets. In a recent forum hosted by the Securities Commission (SC), chairman Tan Sri Zarinah Anwar mentioned systemic risk, systemic stability and systemic regulation 11 times in her keynote address.

An example: “While securities regulators had started to look at risk management framework in their supervision of capital markets way before the global financial crisis occurred, I believe that the issue of systemic regulation requires much further work.

“No doubt the responsibility for managing systemic risks must be shared by regulators, the issue before us is how best to share this responsibility.”

Tanzer, who was in town to attend the forum, agrees. He points out that because local and international responses to a financial crisis may be very different, there is a strong need for coordination among the relevant parties, including cooperation between regulators in emerging markets and their counterparts in developed jurisdictions.

“If you can have that dialogue and discussion that try to draw out the key issues, you can get an amount of peer engagement that’s otherwise impossible. So I think this sort of formal consultation and coordination mechanisms is important,” he says.

“You shouldn’t have a meeting for the sake of having a meeting. Who wants to do that? But the interconnectedness of the system has been very striking for many people. I should say the mechanisms proved their worth in terms of coordinating a response to the problem.

He adds: “Absent that, it’s hard to imagine where we would have been. So we shouldn’t underestimate the mechanisms in trying to be both predictive and pre-emptive, and also in developing the linkages that you need for reacting to a crisis when it arises.”

On an international level, a central player in improving coordination among the market regulators is the Financial Stability Board (FSB). The board was formed in April this year after the Leaders of the G20 had called for a larger membership of the Financial Stability Forum, which had brought together central banks, international groupings of regulators and supervisors, and international financial institutions.

The FSB was established to “address vulnerabilities and to develop and implement strong regulatory, supervisory and other policies in the interest of financial stability”.

Tanzer says fulfilling this objective includes assessing the vulnerabilities in the global financial system, providing an impetus to the implementation of global standards, and identifying areas that need regulatory and supervisory co-operation across the sectors.

“That’s a really important initiative, and one that Iosco is very pleased to participate in as a full member,” he adds.

I believe that the issue of systemic regulation requires much further work... TAN SRI ZARINAH ANWAR

He points out that cooperation in dealing with a financial crisis is also crucial regionally and locally. “At the national level, this point about coordination depends to a degree on the nature of the regulatory institutions that you have,” he says.

“It is harder to intensify the discussions at the regional level. It’s about trying to identify the key risks in your systems and talking about how those risks might flow through and what might be done to deal with them.”

On how the crisis has changed the way regulators look at the capital markets, Tanzer says it has sharpened their focus on pinpointing the main risks that are likely to figure the securities markets.

A number of these, he adds, are in unregulated or under-regulated segments of the markets. This is why the regulators are paying more attention to topics such as securitised and structured finance products, the OTC (over-the-counter) markets and unregulated entities, particularly hedge funds.

“On top of that, we’ve been looking at particular types of market conduct that fall within our remit and where the crisis has thrown up potential problems. A good example is short-selling,” he says.

The regulators are also studying areas where the markets may be subject to either overt or unknowing manipulation or events that may lead to potential problems. For instance, there is concern that the oil futures market may be used to manipulate the commodity’s spot prices.

Another important regulatory aspect influenced by the crisis is the implementation of existing standards.

“Having set the international frameworks for the regulation of credit rating agencies, hedge funds, short-selling and so on, now we are doing work to assess the extent to which national regulatory regimes, which are picking up those recommendations, are dealing with potential gaps or weaknesses,” Tanzer explains.

“For example, with the implementation of the regulation of credit rating agencies in the European Union, Japan, Australia, Canada and the United States, how does that line up with the agreed framework in the Iosco code? Where’s the difference and does the difference matter?”

He offers his Golden Rule for investors: “If you don’t understand how a product works for you, that’s not your fault. It’s the fault of the people who are selling it. It’s their responsibility to explain it in terms that you can understand and agree with, that you think it’s plausible for making money.

“If it’s too complex or vague, there’s a chance that it’s either a scam or that it doesn’t work, because the complexity may be to cover it up.”

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