By John Filar Atwood
IOSCO issued a report that found that implementation of its five secondary and other market principles is high across most member jurisdictions, but lags in new and emerging markets. The five principles seek to promote fair, efficient and transparent markets, and the report provides recommendations to help certain countries strengthen their implementation of the principles.
The five principles, which are a sub-set of IOSCO’s objectives and principles of securities regulation, are intended to promote fair, efficient, and transparent markets. Two of the principles deal with authorization, oversight, and ongoing supervision requirements, and another covers transparency requirements. A fourth principle covers detection and deterring market misconduct and the fifth deals with managing risks such as monitoring large exposures, default procedures and short selling.
The report is based on review of 40 ISOCO member jurisdictions. The review was intended to provide a global overview of the status of implementation of the five principles by participating member jurisdictions, based on their self-assessments.
Securities exchanges. Principle 33 states that the establishment of trading systems, including securities exchanges, should be subject to regulatory authorization and oversight. The review found that this principle has been largely implemented, with all jurisdictions reported having the requirement for the authorization of exchanges. In addition, IOSCO found that implementation has been high in relation to arrangements for supervision of exchanges, disclosure of order routing procedures and execution rules, and equitable access to market rules and operating procedures.
The gaps in implementation of Principle 33 mainly related to some jurisdictions lacking adequate trading control mechanisms and offering no access to books and records of outsourced service providers. Some countries also lacked sufficient prudential arrangements, had no automated pre-trade controls, no criteria for authorization of exchange, and lacked mechanisms for review of trade matching algorithms.
Principle 34 states that there should be ongoing regulatory supervision of exchanges and trading systems to ensure that the integrity of trading is maintained through fair and equitable rules that strike a balance between the demands of different market participants. All participating member jurisdictions reported having requirements for supervision of exchanges, monitoring of day-to-day trading on exchanges, and regulator’s access to all pre-trade and post-trade information. The primary gap on this principle related to the inability of four jurisdictions to withdraw the authorization of the authorized exchanges.
Transparency. Principle 35 provides that regulation should promote transparency of trading. The report states that all participating jurisdictions have requirements for pre-trade and post-trade transparency relating to trading on authorized exchanges. Exemption from real time transparency is permitted in most jurisdictions, and the regulator has access to information relating to such exemptions.
Principle 36 states that regulation should be designed to detect and deter manipulation and other unfair trading practices. IOSCO found that all member jurisdictions have the regulatory framework for prohibition of market manipulation. The gaps in implementation of this principle related to adequacy of enforcement sanctions in one jurisdiction and cross-market surveillance in one jurisdiction.
Principle 37 provides that regulation should aim to ensure the proper management of large exposures, default risk and market disruption. The report states that this principle has largely been implemented, but gaps were found in the monitoring of large exposures in three jurisdictions, default procedures in two jurisdictions, reporting of short selling in four jurisdictions, and reporting of large trader positions in commodity derivatives markets in one jurisdiction.
Recommended improvements. The report provides specific recommendations for improvement in a number of jurisdictions. For example, in Mexico, IOSCO recommended that the securities regulator consider making the default procedures transparent and available to public. It also suggested that the regulator consider developing and implementing a reporting regime for short selling activities and evaluating the need for providing appropriate exceptions in short selling regime for certain types of transactions such as hedging, market making, and arbitrage activities.
In South Africa, which now has multiple exchanges, IOSCO recommended that the regulator consider developing capacity for conducting cross-market surveillance for monitoring trading activities across the exchanges. Since covered short selling is permitted in South Africa, IOSCO also suggested that the regulator consider implementing a reporting regime for short selling activities and evaluate the need for providing appropriate exceptions for certain types of transactions such as market making.