IOSCO Core Principles—Relevance to Stability Considerations and Structural Development
The Objectives and Principles of Securities Regulation (the IOSCO core principles) of the International Organization of Securities Commissions is the key global standard for securities market regulation. The IOSCO bylaws state that the organization’s members (a) will exchange information about their experiences so they can foster the development of domestic markets, (b) will work together to establish standards and improve market surveillance of international transactions, and (c) will provide mutual assistance to promote market integrity. IOSCO adopted the core principles in September 1998, and they have been identified by the Financial Stability Forum as one of the 12 key international standards. The IOSCO core principles provide evidence of “IOSCO’s commitment to the establishment and maintenance of high regulatory standards for the securities industry” (IOSCO 2003b, 2). Over the years, IOSCO has produced many resolutions and numerous technical reports relating to different aspects of securities market regulation. However, before the development of the IOSCO core principles, the organization had never produced a framework statement covering the fundamental aspects of securities regulation.
The purpose of the core principles is to strengthen securities markets by enhancing the regulatory framework. As noted above, the core principles set out three objectives on which securities regulation is based: (a) promoting investor protection; (b) ensuring that markets are fair, efficient, and transparent; and (c) reducing systemic risk. Although each of the principles is presented as equally important, the document underscores the statement in the IOSCO bylaws that IOSCO members should be guided at all times by their concern for investor protection. Investors are to be protected from misleading, manipulative, and fraudulent practices. The most important means for doing so is full disclosure. Regulation should also promote fair and efficient markets with the highest levels of transparency, defined to include both pretrade and posttrade transparency. Finally, the core principles call for regulators to reduce systemic risk. Although regulators cannot prevent firms from failing, the regulations should contain the risks and mitigate the impact of any such failures. The core principles then set out 30 principles of securities regulation that are intended to give “practical effect” to the objectives. Each of the 30 principles is elaborated and explained in significant detail. Because the three objectives are overlapping, it is impossible to link each principle to a specific objective. However, certain principles promote one or two of the objectives in particular.
The IOSCO objectives and core principles (IOP) are stated at a general level—as is the case with other regulatory standards—and permit considerable flexibility in implementation. Each of the 30 principles is supplemented by narrative discussion, illustrating how the objective of the principle might be achieved while simultaneously recognizing that the nature of a particular market will necessarily dictate how the principle is implemented. “The particular manner in which a jurisdiction implements the objectives and principles described in this document must have regard to the entire domestic context, including the relevant legal and commercial framework” (IOSCO 2003b, 3). In addition, the IOSCO core principles were drafted with the recognition that markets change over time and that regulators must have the flexibility to adapt their supervision to changing market conditions. The document notes that there is not a single approach for imple
menting the principles and that multiple approaches, often depending on the broader legal and regulatory system, may be effective.
The IOSCO core principles also reflect the broad scope of responsibilities possessed by most securities regulators. Securities regulators are responsible for a much broader array of activities than banking supervisors. Like banking supervisors, securities regulators supervise the activities of market intermediaries. However, they also supervise securities markets, collective investment schemes, investment managers or advisers, and issuer disclosure. Some securities regulators also have responsibility for enforcing company law. The core principles thus cover a large range of issues. The 30 core principles, therefore, are grouped into eight subject areas as illustrated in Annex 5.D. Principles 1-5 relate to the regulator and to its powers, resources, independence, and accountability. Principles 6-7 relate to self-regulatory organizations and their supervision. Principles 8-10 relate to enforcement, and Principles 11-13 relate to cooperation, including international cooperation for enforcement and regulatory purposes. Principles 14-16 relate to issuers and the disclosure of information. Principles 17-20 relate to collective investment schemes and their operation. Principles 21-24 relate to the supervision of market intermediaries, and Principles 25-30 relate to how a jurisdiction’s overall regulatory structure ensures the integrity of secondary markets, including through robust clearance and settlement function that is addressed in Principle 30.34
Because of securities regulators’ broad responsibilities for the effective functioning of the markets, the links between (a) observance of the IOSCO core principles and (b) market development and stability are fundamental. As the core principles themselves note, securities markets are vital to the development and strength of national economies. They not only support “corporate initiatives, finance the exploitation of new ideas, and facilitate the management of financial risk” (IOSCO 2003b, 1) but also—with the growth of collective investment schemes—have become increasingly important to individual wealth and retirement planning. Sound domestic markets are important to domestic financial development; with globalization, they have become increasingly important to the strength and stability of the global economy. Indeed, much work has been done to show (a) that financial diversification and development outside of the banking system enhances efficiency, as well as encourages development and promotes stability and (b) that an alternative source of intermediation may help strengthen the banking sector, which, again, will enhance financial development and stability.35 Improving the quality of regulation and enhancing the supervision and surveillance promotes investor confidence, better risk management, and more efficient and robust institutions and markets. These actions, in turn, will promote economic growth. In addition, the preconditions for a strong securities market, including a well-functioning legal system and observance of contract and property rights, are the institutional factors that promote both financial stability and financial development.