By Peter OBIORA InvestAdvocate
Lagos (INVESTADVOCATE)-Global Securities regulator, the International Organisation of Securities Commissions (IOSCO) on Tuesday released a report which makes a high level comparative analysis of the key prudential/capital frameworks for securities firms.
The report entitled “A Comparison and Analysis of Prudential Standards in the Securities Sector”, raised concerns on the lack of a uniform global standard for capital adequacy within the securities sector and how this might contribute to regulatory arbitrage, competitive inequalities across jurisdictions and a constrained ability to supervise cross-border groups.
In response, the IOSCO board requested the committee on the regulation of market intermediaries (C3) to examine the existing major capital frameworks currently in effect within the securities sector.
According to the global securities regulator, the two (2) aims of the report are to undertake a high level comparative analysis of the key prudential/capital frameworks for securities firms for the purposes of highlighting similarities, differences and gaps.
The second aim is to conclude on the key themes and issues identified from the comparative analysis and use them to undertake a high-level conceptual framework analysis of IOSCO’s 1989 Report entitled “Capital Adequacy Standards for Securities Firms” (1989 Capital Standards Report), with a view to that document being updated in light of the issues identified in this report.
IOSCO says the report´s comparative analysis focuses on the Net Capital rule (NCR) approach, in particular the US approaches, and the Capital Requirements Directive (CRD), which is founded on the Basel Committee approach. While focusing on those two main prudential frameworks, the report also recognises relevant national variations.
As stated in the 1989 IOSCO Capital Adequacy Report, “capital adequacy standards foster confidence in the financial markets and should be designed to achieve an environment in which a securities firm could wind down its business without losses to its customers or the customers of other broker-dealers and without disrupting the orderly functioning of the financial markets.
It was recommended in the report that Capital standards should be designed to provide supervisory authorities with time to intervene to accomplish this objective. “They should allow a firm to absorb losses. They also should provide a reasonable, yet finite, limitation on excessive expansion by securities firms to minimize the possibility of customer losses and disruption of the markets,” IOSCO affirmed.
IOSCO disclosed that the report highlights prudential regulatory and supervisory areas that might be considered in an update of the 1989 Capital Standards Report, particularly to identify opportunities for regulatory capital arbitrage that might (or actually have) materialised from differences in prudential regulations across jurisdictions.
Also, to account for the increasing use of internal models and the commensurate increase in infrastructure, systems and controls that are necessary to help ensure that firms are not undercapitalised compared to the risks posed by their positions and activities.
