Regulatory challenges in a globalising world Problems Get Compounded When Markets Go Global But Juri
AS SUBPRIME crisis erupts in markets across the world in the clearest sign as yet of how globalised financial markets have become, regulators face one of their toughest challenges to date. The crux of the problem is that the jurisdiction of regulators remains largely national even as players and markets have become international. Yet if investors are not to lose their faith in markets (with disastrous consequences for the world at large), national regulators will have to come up with a more effective answer to the question, how can we ensure better regulation across markets, globally. In a report dated April 2007, the International Organisation of Securities Commissions (IOSCO) points to three ways in which internationalisation of the marketplace takes place: • Investors (or their agents) buy and sell foreign securities and derivatives using intermediaries in the country of the market where the financial instruments have their primary listing and/or are predominantly traded. • Markets offer direct (electronic) access to participants in other countries. • The same and/or closelyrelated financial instruments are listed and/or traded in parallel in different countries. In the first case, the home market regulator is the sole market regulator with responsibility for the regulation of the market though it may still need to share information with foreign regulatory authorities from time to time, e.g., in respect of foreign investors using the market. The second and third scenarios, on the other hand, raise a wide range of issues concerning multijurisdictional oversight. Most commonly, securities traded mainly in their home jurisdiction may also be traded (either in the form of shares or depositary receipts) on markets in one or more other countries. Normally, this occurs when the issuer applies to one or more foreign markets to have its shares (or depository receipts) listed and traded on those markets. Issuers do this mainly when the secondary listing is likely to increase their access to a new pool of investors (or provide other corporate benefits such as raising the company’s profile). Additionally, some issuers’ securities are traded on a foreign market without the issuers having sought a listing or even being aware that the securities are traded in that foreign market. This generally occurs when local intermediaries believe that there is sufficient local trading interest in an issuer and when local law, as well as exchange or market rules, permit such trading. Parallel listing and trading can also involve derivatives. In some cases, the listing and/or trading of a derivative instrument in one jurisdiction is based on an underlying cash market product (e.g., a share) that is traded principally in another jurisdiction. It also occurs when a derivative contract traded in one jurisdiction is based on the same (or an almost identical) underlying asset (or measure) as a derivative contract traded in another. This can occur with derivative contracts based on a commodity (e.g., gold, oil, sugar), as well as on a financial instrument (including an index). The trading of the same financial instrument, or related instruments, in different jurisdictions provides investors with opportunities to trade those instruments in their domestic, rather than a foreign, environment. It can also provide market users who have the ability to trade in more than one jurisdiction with greater choice of instruments, as well as more options for using trading venues that best suit their trading needs. There are two main types of risks from parallel listing or trading. One possibility is that information in one jurisdiction is not readily available in another. Most commonly, this will be information about the issuer or about regulatory action in respect of an issuer’s securities (e.g., a suspension of listing or trading). The second risk is that listing or parallel trading may present opportunities for market users to use parallel trading to engage in conduct that is illegal in one or both jurisdictions. They might, for instance, use a less liquid trading venue if the intention is to move the price relatively easily in order to create a false or misleading view of the price; or they might use parallel trading to avoid, illicitly, a disclosure requirement when building up a position (long or short), or to disguise the opening or closing out of illegal trading. Depending upon the specific nature of the pricing relationship between the derivative instruments (e.g., one might derive its settlement price from the other) and the potential opportunity for market users to create an adverse effect, such trading could raise a market oversight concern that information sharing could help to mitigate. Today most IOSCO members share non-public (confidential) information on a routine basis. But this may not be enough. IOSCO report identifies the kind of information that may be useful for different regulatory concerns. It must be made compulsory reading for all regulators.