Finding global solutions in Toronto

It’s been one year since the catastrophic collapse of Lehman Brothers, which marked the beginning of the most drastic decline in global equity markets. And many of the problems that led to Lehman’s demise have not yet been solved.

Toronto played host last week to the CFA Institute’s Capital Markets Policy Council (CMPC), which addressed ways global capital markets could be improved in the aftermath of the largest financial crisis in 50 years.

Aaron Low, a Singapore-based finance professor and CMPC chair, and James Allen, CFA and head of Capital Markets Policy for the CFA Institute Centre for Financial Market Integrity, talked to Advisor.ca about the work of this 11-person international group of finance professionals.

The crisis that downed Lehman is global. And for that reason, Low asserts there’s need for global coordination of market policy making.

“We need policy coordination to be able to extract the necessary aggregate global risks that affect us. This will go a long way to allow investors have more transparent markets, so they can understand the risks in the global [context],” he says.

Allen, however, argues that as things start to stabilize, regulators seem to be withdrawing from a cohesive international strategy.

“We discussed regulatory convergence with the International Organization of Security Commission about a year ago. Our sense is the issue has been put on the back burner, and in many cases we’ve almost seen some markets starting to look for competitive advantages here and there,” he says.

Improving CRA transparency

In the absence of international regulation, groups such as CMPC take on global importance because their work filters down into the education and policy advocacy of the Virginia-based CFA Institute, which represents more than 100,000 CFA charter holders who work across the globe, and in many of the most important investment institutions.

For example, at its Toronto meeting, the CMPC revisited proposals it offered in 2008 to improve the conduct of credit ratings agencies (CRA). Low’s group suggested CRAs adopt a more transparent rating process easily cross-examined against ratings of other agencies.

“The credit ratings agencies that rate structured products should differentiate those products against traditional bonds, with a suffix or prefix,” Low suggested. “The CMPC isn’t asking CRAs to modify their ratings structure, but they want to understand how the products are rated, so investors can conduct better due diligence.”

This, he says, will help shed more light on complex asset-backed securities.

According to Allen, the group is also advocating for more accountability, and structural protections within the credit rating agencies. “In particular, we’d like to see ratings agencies introduce an executive level compliance officer to make sure the CRAs are abiding by all the rules and regulations, such as the IOSCO code of conduct.”

Difficulty in creating a global framework

Allen, however, concedes it’s difficult to move forward on international issues given the paucity of available [global] resources of information. True, the International Monetary Fund is a resource, but its application to investment processes is limited.

CMPC has discussed trying to make global market assessments more accessible to investors. The group has also met with the IMF, which has quantified and identified the risks on a global basis.

“It tends to be a rather thick report, a sort of after-the-fact report, but they do offer some perspective,” Allen says. “In discussions during the past we’ve talked about having that kind of information available on a broad basis so investors can see what risks are out there. Not everyone is going to pay attention to that, that’s just the nature of the beast. If it’s out there, there’s at least a potential for investors to use this information as another data point.”

Allen also notes that advocacy tends to hit some roadblocks at the regional level. A case in pint are the broker/dealer advocacy groups, which collectively outnumber his group’s membership, sometimes working at cross purposes to creating a better regulatory framework.

“Even today you are seeing debates concerning suitability and fiduciary duty. Our code of standards requires our members to demonstrate a high degree of loyalty and prudence and care on behalf of our investors,” he says. “Frankly, you have to remember, the SEC or the European commission — or the OSC, because this issue [seems] even more stark in Canada — when they put out a consultation. Our response is [outnumbered] by the response from organizations that are issuers or broker/dealers. They may have a different agenda than ours. And a perspective that’s different.”

(09/14/09)