Coalition lauds international security reform

While Canada still weighs the pro and cons of a creating a national securities regulator, the G-20 seems well on their way to establishing international harmonization on a number of key reforms which will benefit the Canadian marketplace, according to an international coalition of investment associations.

At its upcoming Pittsburgh meeting, the G-20 finance ministers will reportedly hammer out more details on a number of international initiatives which focus on better regulation and risk management of securities. Top of the list are reforms on better risk disclosure of securitized assets, the creation on clearinghouses for securitized debt, tighter regulation of international credit agencies and tougher hedge fund oversight.

Spearheading these initiatives will be the Financial Stability Board (FSB) — formerly the Financial Stability Forum.

A push towards having domestic regulation harmonized with an international set of standards was the key argument made in a joint press release from the coalition of industry associations, which includes the Investment Industry Association of Canada, the Japan Securities Dealers Association, the London Investment Banking Association, and the U.S.-based Securities Industry and Financial Markets Association.

“We believe that as countries accelerate the pace of domestic regulatory and legislative reforms, it remains vital to seek a well-balanced and well-coordinated regulatory framework and guard against measures that the G-20 committed to avoid — measures that would create barriers to market entry, distort competition, or encourage regulatory arbitrage,” the group says. “We believe that the G-20’s approach for coordinated and collaborative global regulatory reform could provide a strong basis for regulatory convergence and mutual recognition.”

Ian Russell, CEO of the IIAC, says reform would benefit investment professionals because it will be working to harmonize regulation rather than reaffirm regulatory barriers that exist between nations.

“Unlike the crisis in the 1930s, we have a very much intact global financial market. It is critical to the recovery process that it remains a vibrant global market. We need to ensure that vibrancy and interconnectedness is very much in place, especially as we look at developing countries that are going to play a leading role in the recovery,” he says. “The G-20 have made an amazing amount of progress in less than a year, established the financial stability board that is going to see the implementation of these reforms.”

The work of the FSB has already trickled down in the form of the Canadian Securities Administrators’ (CSA) disclosure requirements for securitized debt products, such as asset-backed commercial paper.

Russell says new initiatives will probably address the creation of a clearinghouse for credit default swaps (CDS) and international standards for credit rating agencies. Russell says CDS instruments remain very powerful hedging instruments, but the global scope of counterparty risk in the market — highlighted by the collapse of Lehman Brothers — makes it necessary for a global clearinghouse to protect the default obligations.

“There is a huge counterparty risk problem. What was identified was a clear need for a central party clearinghouse, so that risks are shared and the securities trade like they do on a stock exchange. That’s a key point in the U.S. administration’s proposals on reform. It’s a clear issue in the Canadian context and in Europe,” he says. “The problem is we want to design the clearinghouses in a way that ensures a seamless move of securities across borders.”

Russell says the European Union has a clearinghouse proposal, but it doesn’t cover U.S. issued swaps.

“Don’t set these regional barriers in place: unless the credit default swaps are in the clearinghouse of the region they were issued, such as the EU, they can’t trade — that’s not appropriate,” he says. “We need to recognize and establish international standards and then permit these securities to be traded across jurisdiction.”

The same issue applies to the regulation of credit rating agencies. The IIAC would like to see international standards of conduct set up.

“We are totally supportive of regulating credit agencies, there should be international standards and they should be accepted by all regulators. If different jurisdictions put them in place, they should be recognized. If you are Moody’s in the U.S., your rating should be accepted in Europe because you meet an international standard,” Russell says.

One barrier to Canada’s implementation is its lack of a Canadian securities regulator. While the CSA has generally been on-board with the international proposals, Russell says implementing reform would be a lot quicker with one national regular.

“Canada will be implementing those reforms in tandem with other countries around the world — one of these was the CSA rules on capital disclosures,” he says. “One of the things we certainly need more, that will make the process move more expeditiously, is a single regulator. Not only would that allow for greater speed of reforms but it would create better coordination of banking and insurance regulation, which is all part and parcel of all of creating a better regulatory system.”

(09/03/09)