The future growth and interconnectedness of international financial markets demands a global institutional framework for regulatory oversight, said David Wright, secretary general of International Organization of Securities Commissions, in a speech last night. Such a framework should be established by an international treaty, which has enforcing authority.
Speaking at the Atlantic Council in Washington DC on the future of global financial institutions, Wright said that a global institutional framework could foster financial stability and allow global standards to be applied. A disputes settlement process similar to that used by the World Trade Organisation could defend sound regulatory practice and avoid suffering the consequences of erratic implementation in bigger jurisdictions.
Wright explained the role of the framework wouldn’t be to enforce a one-size-fits-all harmonised set of rules, but ensure that globally agreed policy principles are properly implemented by all jurisdictions that are signatories to the treaty arrangements. He insists that such a framework “should encompass at least the Financial Stability Board and the main global sectoral standard setters”.
Urging the US to get involved in such an effort, he added this framework would give the country a unique opportunity to lead a movement towards more effective global regulatory institutions because of its technical expertise.
“The US industry would have huge export opportunities in the predictable, big, well-regulated markets of tomorrow. Indeed agreement on the new global financial regulatory framework could be accompanied by supplementary market opening initiatives in the WTO,” he said.
Analysing the current global regulatory situation, Wright said that many emerging countries are under-represented in the global financial reform processes.
Another issue he pointed out was the proliferation of global bodies, which he believes dilutes the concentration on big issues, as each entity focuses on finding new regulatory subjects. Wright further added that the dominance of central banks and regulators in the key global policy committees is leading to a culture of risk minimisation rather than risk optimisation, which he says that will not be appropriate for securities markets.
Wright predicted that a major global expansion of market-based financing and subsequent securities markets growth. As more capital markets emerge and the world becomes more interconnected financial markets could be susceptible to more shocks and cross-border contagion. Such a world will be more prone to widely different interpretations of global standards, with a higher propensity for overlapping laws and cross-border legal disputes. The answer he insisted lies in a global institutional framework.