IOSCO publishes Impact On and Responses of Emerging Markets to the Financial Crisis

EXECUTIVE SUMMARY

1. The IOSCO Emerging Markets Committee (EMC) Chairman‘s Task Force on the Current Financial Crisis (the Task Force) was formed to review the impact and implications of the financial crisis on emerging markets, and the measures introduced by the emerging market regulators in response to the crisis. A Survey questionnaire (Survey) was circulated to all EMC jurisdictions to seek responses on their major regulatory and supervisory issues, in addition to seeking specific feedback on the sources of financial contagion in their jurisdictions and the measures taken to reduce instability.
2. This Consultation Report (Report) provides a relatively broad reflection of the experiences of EMC members in responding to the financial crisis given the different levels of development and the degree of the impact of the crisis on their markets. The Report also seeks to establish the key regulatory and supervisory challenges identified by securities regulators in the current environment.
3. The responses suggest that the impact of the current crisis on emerging markets has manifested itself in different ways, depending on a number of factors relating to the depth and development of the various capital markets. Nonetheless, these trends are indicative of the extent to which emerging markets as a whole have become much more integrated within the global financial system, and therefore may be increasingly exposed to systemic risk and shock transmission in turbulent times.
4. Following from the review of the information provided by respondents, a number of findings have been identified for consideration and where further work may be necessary.
5. Firstly, emerging markets are now more interlinked and exposed to more risks, both from within and outside the financial system. Hence, there is a need for greater global inclusion of emerging market authorities on regulatory matters, from standards setting to global supervisory activities, as well as a need for greater information sharing among regulators. The recent pronouncement of the G-20 Summit on 2 April 2009 takes on greater significance and may serve to focus the manner in which not only emerging markets, but all securities markets respond to the current crisis.
6. The Report findings also highlight the need to strengthen regulatory and investor protection frameworks, as well as effective prevention and management of systemic risks and instabilities in the emerging markets. In this context, it is increasingly apparent that emerging markets must actively cooperate with developed jurisdictions in international financial coordination and have a greater voice in the decision-making processes in both regulatory issues as well as in identifying relevant responses to a crisis. The International Organization of Securities Commissions, in particular, may play a larger role in facilitating necessary technical assistance and training programmes in key areas such as market surveillance, intermediary supervision and systemic risk assessment, as well as through forming specific task forces to undertake thematic work.
7. As domestic financial systems develop and become more complex, so too must their regulatory frameworks; strong supervision and investor protection, and effective enforcement are key building blocks. Traditional dichotomies that have become outdated must be addressed; legacy paradigms must be revised and new regulatory frameworks must conform to international principles. More specifically, emerging market regulators and supervisors must protect consumers and investors, support market discipline, avoid adverse impacts on other jurisdictions, reduce the scope for regulatory arbitrage, support competition and dynamism, and keep pace with innovation in the marketplace.
8. As capital markets are now a key component of modern financial systems in facilitating growth, governments should not overlook capital markets in their efforts to modernise and
   develop their economy. However, capital market development must be properly sequenced
   to manage the risks of liberalisation in order to maintain overall stability as macroeconomic
   conditions and financial systems have become more interconnected.

Impact On and Responses of Emerging Markets to the Financial Crisis