MARKETS WATCHDOGS URGED TO FLAG UP RISKS
- By Jeremy Grant
Markets watchdogs must develop a mechanism to flag up risks to the financial system and spot dangers erupting from trading failures or abuse, the new head of the umbrella body for the world's securities regulators has warned.
"We've got to be looking more at emerging risk and have an ‘early warning system', if you like. It's important that that we are collectively able to identify risk," said David Wright, secretary general of the International Organisation of Securities Commissions (Iosco).
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Mr Wright's comments come as Iosco begins its annual conference in Beijing and as the shock $2bn trading loss at JPMorgan Chase continues to reverberate. The US bank's trades in credit derivatives – part of a family of financial instruments that contributed to the 2008 crisis – have once again put the spotlight on risk-taking in markets.
Mr Wright said Iosco was working on how to develop a "global database" of trades; as well as on guidelines for regulators on surveillance of "high-frequency" trading, a type of rapid automated dealing that has been growing in US and Europe.
"I don't think we can say today that we have a full understanding [of the data] or that we have all the necessary data there at one time," Mr Wright told the Financial Times ahead of his arrival in Beijing as Iosco's new head.
"The regulators have got to have access – and immediate access. Ideally you've got a signalling system at the global level. It's a huge issue."
Mr Wright said that even though the financial crisis had sparked a sweeping overhaul of the way markets exchanges and clearing houses operate, there "may well be other risks building up".
"We need to get on top of those, we need to keep talking about emerging risk and to strengthen our capacity, to discuss generic risk in the system as early as you can," he said.
Iosco groups most of the world's national markets watchdogs such as the US Securities and Exchange Commission, German regulator BaFin, the UK's Financial Services Authority and the Securities and Exchange Board of India.
Mr Wright was one of Britain's most respected markets experts at the European Commission in Brussels, where he spent 34 years until arriving at Iosco's Madrid headquarters in March. He replaced Greg Tanzer, now a commissioner at the Australian Securities & Investments Commission.
Mr Wright said that securities regulators would have to play a much bigger role in helping to pre-empt future crises – what he called a "forward phalanx role".
That was particularly important because there had been a "complete fragmentation of intermediation" in markets, with "completely new forms of trading" emerging.
Trading of shares in the US and Europe has proliferated across multiple types of trading platforms away from traditional stock exchanges, including "dark pools" operated by banks and brokers.
Rapid computerised trading, including high-frequency trading, has grown fast, posing fresh challenges for watchdogs trying to oversee markets where once most trading was done at slower speeds and largely on exchanges.
"All this can be a force for good but at the same time it's a huge challenge for regulators," Mr Wright said. "We should be looking at how the market structure is evolving."
