IOSCO on 2016 risk

The International Organization of Securities Commissions (IOSCO) has published its Securities Markets Risk Outlook 2016. It says the report identifies and examines key trends in global financial markets and the potential risks to financial stability.

The Outlook examines key trends in global financial markets and their impact on securities markets. It focuses on: The impact on securities markets from interventions of central banks worldwide; The impact on securities markets from falling commodity prices and uncertainty over global growth trends; General growth trends in corporate bond, equity and securitised product markets; Recent trends in emerging market securities markets related to leverage, capital flows, and market-based financing; The increasing digitalisation of financial markets and potential for technological disruptors.

The Outlook also identifies and examines, in depth, four potential risk areas.

Corporate bond market liquidity: The expansion in corporate bond primary markets has raised some concern about whether the secondary market structure will withstand periods of market stress going forward. The outcome of the analysis of the available data is nuanced and further data gathering should shed more light.

Risks associated with the use of collateral in financial transactions: Collateral is playing a growing role in financial markets. Services such as collateral optimization, collateral transformation, collateral arbitrage, re-hypothecation and reuse will continue to increase. These collateral management activities may have inherent risk transfer as part of their make-up, lead to greater market interconnections, have greater asset encumbrance (in some circumstances) and may create the potential of risk concentration in those participants that provide such services.

Harmful conduct in relation to retail financial products and services: Harmful conduct in retail financial products and services can appear in many different forms. A frequently cited case involves the mis-selling of unit-linked products and structured retail products. These products are inherently complex and many investors and advisers fail to understand them sufficiently. High commissions on these sales also can drive investment advisers to “push” these products, to the detriment of some investor classes.

Cyber threats: In securities markets, cyber threats have increased in frequency, sophistication, and complexity over the past few years, and have become a systemic risk. Securities markets regulators around the world are focusing on mitigating cyber risks and increasing the cyber resilience of financial systems.

The risks addressed in last year´s Outlook – the search for yield, capital flows to emerging markets, central clearing, use of collateral, and governance and culture of financial firms – remain on IOSCO´s long list of risks. They continue to be monitored and are being addressed by IOSCO policy work, it says.

This new Outlook also discusses the issues around the asset management industry, in light of the current debate over the systemic importance of this industry and the regulatory work underway. To enhance the understanding of the fund industry, there is a need for further work to which IOSCO and its members are actively contributing.