IOSCO was established as a global organization in 1983. It is the most im-portant international organization engaged in the regulation of capital markets
1 J. Żabińska, A. Sarnik-Sawicka: Forum Stabilności Finansowej jako organizacja nadzorująca i monitorująca międzynarodowy rynek finansowy. W: Rola międzynarodowej współpracy finan-sowej w tworzeniu norm i regulacji ostrożnościowych zabezpieczających stabilność systemów finansowych. Red. J. Żabińska. Akademia Ekonomiczna w Katowicach, Katowice 2008, s. 12.
The rise of IOSCO for the strengthening of the international financial system 147
and bringing together the market regulating and supporting bodies bearing eve-ryday responsibility for the implementation and the application of securities-related regulations. The main objectives of IOSCO include2: the cooperation within establishing common regulatory norms aimed at supporting fair and ef-fective operation of financial markets; the exchange of experience and informa-tion to improve the operainforma-tion of nainforma-tional securities markets; joint activities un-dertaken to establish norms and the effective supervision of international securities transactions; the mutual assistance within the provisions of security for securities markets by rigorous observance of norms and counteracting financial crimes. The established objectives are defined by specific committees compris-ing the organizational structure of IOSCO; accordcompris-ing to the guidelines regulatcompris-ing the securities trading.
In September 1998 IOSCO implemented „Objectives and Principles of Se-curities Regulations” that are presently accepted as the international financial standards governing the securities market. In 2003 the organization prepared the Methodology For Assessing Implementation of the IOSCO Objectives and Prin-ciples of Securities Regulation, modified in 2011, that enables to assess objec-tively the level of implemented objectives and principles by the states that they were ratified by as well as to analyze and assess critically their execution and shortcomings. The subject of these principles are three groups of tasks (contribu-tion to the provision of financial stability): investor protec(contribu-tion, reliability guaran-tee, transparency and effectiveness of markets, system risk decrease3.
In accordance with IOSCO recommendations the most important element related to the protection of investors is the possibility of obtaining full informa-tion since it is thanks to such possibility they may assess the risk and benefits of the investments carried out in a better way. Other significant elements concern-ing the protection of investors include also: the formulation of appropriate prin-ciples within the framework of issuing licences and permits for investors, the de-termination of capital requirements, the choice of an appropriate supervision over agents by setting certain minimum norms binding upon market participants, the development of a reliable system enforcing the observance of law. Investors should be provided with the possibility of using an independent system or other measures enabling to obtain compensation for incurred damages as a result of improper practices of agents or other participants4.
2 IOSCO statute, materials provided by Komisja Nadzoru Finansowego (Polish Financial Supe-rvision) www.knf.gov.pl
3 B. Puszer: Międzynarodowa Organizacja Komisji Papierów Wartościowych (IOSCO) – jej zna-czenie w stabilizowaniu systemu finansowego ze szczególnym uwzględnieniem systemu banko-wego. W: Stabilność i bezpieczeństwo systemu bankobanko-wego. Red. J. Nowakowski, T. Famulska.
Difin, Warszawa 2008, p. 104.
4 Methodology for assessing implementation of the IOSCO objectives and principles of securities regulation. IOSCO, September 2011, p. 11-12.
Blandyna Puszer 148
Reliability guarantee, transparency and effectiveness of markets is closely related to the investor protection. Legal regulations should lead to disclosing and limiting manipulations and other dishonest market practices as well as to punish-ing for such practices. One of the intended effect of regulatory activities should involve the development of such market organizations that would not favour one market participant at the cost of others. Moreover, investors should be provided with a reliable and equal access to the market and price information. Regulations should support such market practises that ensure an honest treatment of orders and a credible process of price formation. On an effectively functioning market information should be provided on current basis and be accessible to a wide group of recipients. Transparency of the market operation is defined by IOSCO as the degree to which all information concerning the securities trading is an-nounced in real-time. In accordance with IOSCO assumptions the regulatory ac-tivities should guarantee the highest level of transparency5.
Risk management is closely related to the investor protection. In the IOSCO opinion risk-bearing is one of the basic features of an actively functioning mar-ket and therefore adopted regulations should not, without a necessary need, limit the law to justified risk-bearing. Regulators are obliged to enable and support the effective risk management and to implement capital requirements as well as other prudential requirements sufficient for bearing justified risk. They should also enable the absorption of some losses and the control of excessive risk tak-ing. For the purpose of the decrease in the system risk it is the efficient and accu-rate process of transaction settlement, which is properly supervised and in which effective risk management methods are applied, that is of significance. IOSCO pays attention to the instability that may arise from events taking place within another jurisdiction area and therefore the regulators’ reaction to market distur-bances should include activities covering the cooperation and information exchange. The organization is of the opinion that although regulators cannot be expected to prevent the financial bankruptcy of market agents, their regulatory activities should aim at lowering such risk (e.g. by the implementation of capital requirements and internal control requirements). However, in the event of a bankruptcy legal regulations should aim at minimizing its effects and most of all at limiting the risk in such way that it should be borne only by the institution going bankrupt. In connection with the above market agents should be subject to appropriate and valid capital requirements and other prudential requirements.
Besides, such agent should be obliged to close his activity without putting his customers and contracting parties to losses and without causing system dam-ages6.
5 Ibid., p. 12.
6 Ibid., p. 13.
The rise of IOSCO for the strengthening of the international financial system 149
For the purpose of the execution of the subject matter of IOSCO regulation securities trading principles categories as below have been developed (table 1).
Table 1 Principles related to the regulations governing the securities trading
Category Types of principles
1 2 Principles
re-lated to a regu-lator
− The scope of responsibility of a regulator should be clear and presented in an objective way
− A regulator should have full independence of action and bear exclusive responsibility for performing its functions and exercising its rights
− A regulator should hold required licences, have appropriate resources at its disposal and have full capacity to perform its functions and exercise its rights
− A regulator should apply clear and coherent regulatory processes
− Employees of a regulator should observe professional standards, including appropriate norms of the confidentiality obligation
− A regulator should contribute to monitoring and mitigating the system risk
− A regulator should take actions aimed at the verification of legal regulations
− A regulator should be aimed at ensuring that the conflict of interest and the avoidance of incentives would be eliminated, disclosed or managed in another way
Principles re-lated to self-regulation
− Self-regulating organizations (SRO) that to some extent supervise directly the area of their competences to the degree corresponding to the volume and complexity of markets should be subject to the supervision of a regulator and adhere to standards of honesty and confidentiality with reference to the performance of their obligations and rights Principles
− A regulator should hold licences of broad scope to conduct controls, tests and supervi-sions
− A regulator should hold licences of broad scope to enforce the law
− The regulation system should ensure the possibility of effective and credible exercising of rights to conduct controls, preliminary investigations and supervisions and the rights to enforce the law; this system should also ensure the execution of an effective scheme leading to the satisfaction of binding requirements
Principles
− A regulator should have the right to exchange both public domain information and secret information with home and foreign units cooperating with such body
− Regulators should develop mechanisms defining the conditions of the exchange of both public domain information and secret information with home and foreign units cooperat-ing with such body
− A regulatory system should enable the provision of assistance to foreign regulators mak-ing enquiries resultmak-ing from the functions and rights they fulfil
Principles
rela-ted to issuers − Investors should have access to complete, accurate and timely conveyed financial results and other information that is significant when taking an investment-related decision
− Owners of securities should be treated with honesty and in accordance with the principle of equal rights.
− Accounting standards and financial statement audits should be of high and internationally recognized quality
− Auditors should be the object of appropriate supervision
− Auditors should be independent from the subject audited
− A standard audit should be of top quality and internationally recognized
− Rating agencies should be subordinate to appropriate supervisory bodies. The regulatory system should ensure that rating institutions whose ratings are used for legal purposes are subject to registration and constant supervision
− Other entities offering analytical and information services to investors should be subject to regulations and the supervision adequate to their activity on the market
Blandyna Puszer
− A regulatory system should set norms related to licensing and regulating in relation to these who want to operate in the market of collective investment schemes or to execute such scheme
− A regulatory system should contain principles setting the structure and the legal form of collective investment schemes as well as the principles of segregation and protection of customers’ assets
− Regulations should require information accessibility as it was established in the princi-ples related to issuers to the degree that is indispensable to assess a given collective in-vestment scheme for a particular investor and to determine the value of such investor’s participation in the scheme
− Regulations should ensure the existence of an appropriate and open basis for establishing the value of assets and for setting prices and conditions of the purchase of participation units in collective investment schemes
− Regulations should guarantee that hedging funds and/or hedging fund managers are un-der the appropriate supervision
Principles re-lated to finan-cial intermedi-aries
− Regulations should define minimum standards of the commencement of an activity by fi-nancial intermediaries
− Capital requirements and other prudential requirements should be set as regards financial intermediaries
− Financial intermediaries should be required to be compliant with the norms of the inter-nal organization and the pursuit of an activity for the purpose of the customers’ interests protection and within the framework of which an institution management assumes pri-mary responsibility
− There should be procedures of conduct in case of an intermediary’s bankruptcy to mini-mize damages and losses incurred by investors and to limit the system risk.
Principles re-lated to the secondary market
− The secondary market system, excluding securities markets, should be subject to the au-thorization and the supervision of a regulator
− There should be the constant supervision of stock exchanges and securities trading sys-tems provided by a regulator in order to guarantee the reliability of securities trading by the observance of honest and fair principles that would introduce a proper balance be-tween requirements of various markets participants
− Legal regulations should promote the transparency of stock exchange operations
− Legal regulations should be constructed in such a way so as to detect and limit manipula-tions and other dishonest stock market practices
− Regulations should aim at the provision of an appropriate management of the consider-able risk, the insolvency risk and the market disturbances-related risk
Principles re-lated to the settlement and clearing sys-tem
− The system of transaction settlement by means of securities should be subject to the su-pervision of a regulator and should be constructed in such a way so as to provide enough assurance that it is honest, effective and efficient as well as that it limits the risk
Source: On work on the grounds of Objectives and Principles of Securities Regulation. IOSCO, June 2010, p. 4-12 and Methodology For Assessing Implementation of the IOSCO Objectives and Principles of Securities Regulation. IOSCO, September 2011, p. 6-8.
IOSCO includes also in the framework of international financial standards the so-called practice i.e. the guidelines how to fulfil the above mentioned prin-ciples. The guidelines take the form of resolutions, acts and reports. Not only does IOSCO establishes them but also supervises their implementation. Their
The rise of IOSCO for the strengthening of the international financial system 151
observance is one of the conditions for a stable financial system to function. It should be emphasized that these practices will be and should change along with the changes taking place in the international financial system. It should be em-phasized that although the observance of the above mentioned principles will not eliminate all threats and risks related to the functioning of the capital market, it will still allow to limit them considerably.