IOSCO final report calls for “evolving” regulation
Madrid-based IOSCO has published its final recommendations in response to the G20
The International Organisation of Securities Commissions has set out its final recommendations on the integrity and efficiency of markets, calling for regulators to think deeply about the effects of their regulation and keep monitoring the markets regularly to ensure that changes are taken into account.
According to IOSCO, regulators should:
- Regularly monitor the impact of fragmentation on market integrity to ensure the applicable regulations are still appropriate
- Regularly evaluate the regulatory requirements on different trading spaces and seek to ensure that they are consistent
- Seek to ensure that proper arrangements are in place to disseminate information as close to real time as possible
- Consider the potential impact of fragmentation on the ability of intermediaries to comply with order handling rules
IOSCO’s document, Regulatory Issues Raised by Changes in Market Structure, is the final response to a request made by the G20 in November 2010 for recommendations to promote the integrity and efficiency of markets.
IOSCO had originally responded in October 2011, and these were endorsed by the G20 with a request for further work. IOSCO then called on its C2 Committee on Regulation of Secondary Markets to analyse the current market structure and raise any issues on the price formation process and the impact of market fragmentation.
Difficulties identified by IOSCO include the challenges in the accuracy and reliability of OTC trading data, as well as the need to consider the evolution in the trading of domestic equities in foreign jurisdictions. While the report emphasised that the gap in terms of regulatory requirements had closed up significantly between exchanges and non-exchange platforms since 2001, it also added that considerable differences remain in OTC trading.
One of the key points of the report was the need to achieve the widest possible access to trade data to ensure that price discovery is not harmed by fragmentation. In Europe, the European Commission’s upcoming MiFID II rulebook mandates the creation of a consolidated tape of post-trade data, but no solution has yet been implemented.
“Access by market participants to relevant data sources is important to improve their ability to efficiently compare prices across trading spaces, identify trading opportunities and make appropriately informed trading decisions about where and when to trade,” says the report.
One of the major questions the capital markets have faced in recent years has been how to deal with the effects of market fragmentation, as different trading venues, dark pools and CCPs have established themselves in competition for equity business. Fragmentation was identified by IOSCO as a cause of duplication of cost, as well as a potential source of trading methods and business practices that may diminish efficiency and not be in the interests of the market as a whole.IOSCO also warned that the dispersion of liquidity could result in less efficient price formation and higher volatility.
However, IOSCO was also quick to point out that competition creates incentives for trading centres to invest in creating new products, keep fees low and provide a high quality service that benefits investors.
The document concluded by restating its core emphasis was that regulation should be flexible and should be changed over time, based on close monitoring of financial markets.
“As trading spaces evolve, the regulatory framework should evolve as well,” says IOSCO. “Ongoing monitoring of the impact of fragmentation on markets is essential. The assessment should include whether existing requirements should be revised, clarified or amended to be more effective in a fragmented market.”
