IOSCO vs. SEC: one-all, ball in the centre

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23 January 2013
Joséphine de Chazournes
Yesterday the Securities and Exchange Commission (SEC) has issued a public statement concerning the publication by the International Organization of Securities Commissions (IOSCO) of the Final Report on "Suitability Requirements with respect to the Distribution of Complex Financial Products", to underline they did not approve the final report and that they objected its publication. But IOSCO is an international body that represents 95% of national securities regulators, amongst which the SEC. IOSCO is known to the wider public for the work it has done and is still doing in response to the G20’s request to provide the Financial Stability Board (FSB) with regulatory principles or indications on how to regulate and supervise exchange-traded, OTC derivative and physical commodity markets. IOSCO's three main objectives of securities regulation are:
  • protecting investors;
  • ensuring that markets are fair, efficient and transparent;
  • reducing systemic risk.
The most recent topic of debate between the SEC and IOSCO was Money Market Funds (MMFs). Indeed, as mentioned in Celent's recent Shadow Banking report, the SEC last September tried to add new rules on MMMF, especially to abandon the fixed $1 share price and adopt a variable net asset value structure, but also to require funds to set aside a capital buffer, possibly combined with restrictions or penalties on client redemption/withdrawal. However, there was such a strong campaign against these that the SEC never even got to vote on what consultation to propose to market participants. The issues now have to be taken directly by the Federal Reserve or the Financial Stability Oversight Council (FSOC). Meanwhile, IOSCO has had come up with proposals to the FSB to regulate MMMFs even beyond what is accepted by the industry as already a significant improvement compared to pre-crisis times. However, IOSCO’s board includes 32 members and required unanimity of vote on those proposals to provide them to the FSB. The regulators that had been the most involved in drafting those rules were the SEC and the French regulator, l’Autorité des Marchés Financiers (AMF), and recently mostly the AMF according to market players; hence there was a big unknown on what kind of proposals would be put through. In November 2012, the FSB published a consultative document on MMFs supporting similar measures to those proposed by tthe SEC as part of its proposals for regulating shadow banking. In particular, the FSB’s consultative document included the idea that MMFs that offer a stable NAV should be subject to measures designed to reduce the specific risks associated with their stable NAV feature and internalise the costs arising from these risks. But that regulators should require, where workable, a conversion to floating NAV. Alternatively, additional safeguards should be introduced to reinforce stable NAV MMFs’ resilience and ability to face significant redemptions. This latest friction comes in timely: the secretary general of IOSCO, David Wright, is hoping to expand the institution's mandate to allow it to better enforce consistency across international regulations. And remember that the newly elected governor of the Bank of England, Mark Carney, is also the current Chairman of the G20's Financial Stability Board, we can probably foresee he will use some of his power to have these recent international regulations implemented internationally.


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Asia-Pacific, EMEA, LATAM, North America