15 October 2013

IOSCO launches its first Securities Markets Risk Outlook

The four main risks the report identifies and analyses in depth relate to the following:

1. Risks related to low interest rate environment. Expansionary monetary policies have reduced interest rates to the point that real rates are at times negative. While these policies may help  stimulate the real economy, spill-over effects may create potential risks for securities markets. A  search for yield is turning investors towards leverage products such as CDO´s and leveraged real estate investment funds.

2. Risks related to collateral management. In response to global policy requirements, demand  from investment firms for high quality collateral has increased significantly. More generally, bank holding companies with over the counter (OTC) dealer operations must locate high-quality collateral to meet initial and variation margin requirements for their OTC trades. Additionally, central banks have been absorbing collateral to provide needed bank funding. This growing demand has altered the balance of collateral in the system, diminishing availability of high-quality collateral and could impact pricing.

3. Risks related to derivatives markets. OTC derivatives markets have undergone significant reform since the financial crisis. This reform entails the mandatory clearing of derivative contracts through central counterparties (CCPs). CCPs are designed to reduce systemic risk in the derivatives market by reducing counterparty risk. But shifting the risk from bilateral OTC contracts to a single point of infrastructure is a challenging balancing act.

4. Risks related to capital flows of emerging markets. Emerging Market Economies have  experienced significant capital inflows in the post-crisis era. Debt securities and non-bank lending have overtaken foreign direct investment and banking lending as the main source of these capital inflows. After the announcement of the tapering of the expansionary monetary policies of the FED, a sudden reversal in capital inflow occurred, highlighting the need for further structural reforms aimed at making securities markets more resilient.

Speaking of the Outlook, Chair of the IOSCO Board, Greg Medcraft, said: "I see it as a great example of IOSCO being proactive, forward-looking and ahead of the curve in assisting us to achieve our objectives of protecting investors, ensuring markets are fair, efficient and transparent and reducing systemic risk".

Full report

Full press release

© IOSCO