The changes are an update to the standards, rather than a fundamental reform, as the Principles and Methodology are deliberately formulated in general enough terms to remain valid even when the market and legal situations change. IOSCO has thus succeeded in creating global guidelines for securities regulation which can no longer be ignored by any national or other legislators or supervisors and which therefore make a significant contribution to globally consistent and compatible market and supervisory structures.

Amendments

The amendments which have been made now affect very different areas. For example, the Methodology now stresses the importance of the education of investors by supervisory authorities, provides more detail on avoiding conflicts of interest in the securitisation of products, and asserts the need for formalised procedures for the identification of systemic risks. In addition, IOSCO has clarified its guidelines on the independence of regulatory and supervisory authorities.

Regarding the regulation of collective investment schemes, the guidelines on liquidity management and the regular assessment of asset components of the schemes have been adjusted. Moreover, the Principles now classify money-market funds and exchange-traded funds (ETFs, i.e. retail funds which are traded on an exchange) – as categories of funds which require or could require particular guidelines.

Regarding the regulation of intermediaries, additional requirements for the protection of client assets and for the differentiation between types of clients in the distribution of financial products have been provided. Leading from experiences gained during the financial crisis, guidelines on dealing with intermediaries trading in over-the-counter (OTC) derivatives have also been added. In the field of secondary market regulation, the Methodology now distinguishes more closely between guidelines for securities and derivatives markets, on the one hand, and those for the markets for OTC and commodity derivatives on the other. IOSCO also accommodates the specificities of the OTC derivatives markets, for which it has introduced numerous new guidelines affecting organised trading, central clearing, margin requirements for non-centrally cleared derivatives and reporting to trade repositories.

Moreover, as a reaction to the manipulation of important benchmarks for securities trading, the guidelines for the competencies of supervisors to pursue such improper practices have been tightened up. In this context, IOSCO also mentions high-frequency trading as a phenomenon of which supervisors should continue to assess the impact.

Revision process

BaFin took the lead in this most recent revision of the Principles and Methodology, a complex process involving the intensive participation of the entire organisation of IOSCO with all its thematic working groups – in particular, the IOSCO Board with its eight permanent policy committees (accounting, auditing and disclosure; secondary markets; market intermediaries; investment management; international cooperation; credit rating agencies; commodities derivatives markets and retail investors) and other temporary working groups.

The reports and resolutions which IOSCO itself has published since the last revision form an important point of departure for the assessment. First and foremost in this process are the detailed standards such as technical principles, standards and recommendations, while "good practices" and trends resulting from member surveys on certain supervisory topics are less important.

Objectives of securities regulation

IOSCO stipulates three main Objectives of securities regulation in the Principles. Firstly, investors must be protected from improper practices in securities trading. Key tools for effective investor protection are clear rules, including to combat market manipulation and insider trading, the consistent enforcement of these rules by supervisory authorities, transparency of information which is important to make investment decisions, and appropriate authorisation requirements for market players.

The second Objective, which is closely linked to that of investor protection, is ensuring that markets are fair, efficient and transparent. The two Objectives overlap in many respects: for example, there can only be fair markets if regulation enables improper trading practices to be detected and penalised. Moreover, there can be no efficient markets without transparency of both pre-trade and post-trade information for investors but also with regard to issuers and products.

The third Objective, which results from the experiences of the financial crisis, is the reduction of systemic risk. In the securities market, the supervisory authority must ensure that as well as prudential requirements for intermediaries, there are trading and settlement infrastructures in place which can absorb the collapse of individual market players and help to maintain order when there are disruptive developments on the markets.

38 Principles

IOSCO provides more detail on the three Objectives in 38 Principles, which each formulate basic provisions in one sentence that regulators and supervisors should follow. They include all the major areas of a securities trading system in the broad sense and are divided into ten categories.

The first four categories may be said to constitute the overarching part and cover fifteen Principles. These include rules for setting up a body which sets the rules in a securities trading system and ensures their enforcement – this may be a supervisory authority or a self-regulatory organisation of the private sector, for the enforcement of rules themselves and for the conditions of national and international cooperation of supervisors. The other six categories contain Principles for rules for dealing with issuers of financial instruments; market actors who play a central role in the transparency of the system, such as auditors and credit rating agencies; collective investment schemes; securities services providers like banks and other securities traders (market intermediaries); and secondary markets like exchanges and other trading systems. The Principles on secondary markets also include statements on clearing of transactions.

The Principles set a clear direction for the regulation of securities trading; however, they assume that a country can ensure legal certainty in its corporate, commercial, banking and insolvency law. Moreover, in themselves they are too abstract to support legislators or supervisory authorities in the construction of a supervisory system. IOSCO points out that the numerous resolutions and reports which it has published since its foundation can and should be used to better understand the Principles, but given the large number and varied nature of the over 500 publications, it is almost impossible to quickly find which reports and resolutions are relevant to any particular issue.

Methodology

Against this backdrop, a central purpose of the Methodology is to combine these detailed standards and facilitate their use in the specific implementation of the Principles. It elaborates on each of the 38 Principles on the basis of the detailed standards already published by IOSCO. The aim is to provide national and other regulatory and supervisory authorities with a sufficiently detailed and clear framework to conceive a consistent, functional and internationally compatible system of securities supervision. IOSCO therefore offers important technical support to emerging nations, in particular, in the establishment and promotion of their securities markets.

At the same time, however, the Methodology constitutes a tool with which to review objectively the extent to which a country has actually implemented the Principles and the standards they are based on. IOSCO is not the only one to make use of this tool; of more importance is the fact that the International Monetary Fund and the World Bank also draw on the Methodology to check whether a country's supervisory system meets international standards in the course of their Financial Sector Assessment Program (see BaFinJournal July 2016 - only available in German). The Financial Stability Board (FSB) sees the Principles as one of the key standards for sound financial systems – alongside the principles of the International Association of Insurance Supervisors (IAIS) and the principles of the Basel Committee on Banking Supervision (BCBS). Germany's implementation of the IOSCO Principles last underwent thorough review in 2011.

Simple application

To meet both goals, the Methodology is designed to allow users to identify whether the IOSCO Principles have been adequately implemented relatively easily. It consists of several chapters which each deal with one or more Principles. Each chapter starts with an introduction which provides an overview of the regulation for the relevant area.

The Methodology contains information on central aspects of regulation – Key Issues – for each individual Principle. IOSCO also supplies Key Questions which may be used to check the implementation status of a system. Special explanations make the Key Issues and Key Questions easier to understand and apply. If it is not possible to answer a question in the affirmative for a securities trading system, it is clear that there are deficiencies which will be reflected in the overall assessment of the implementation status of a Principle. The “Benchmarks” govern how this is to be ascertained. They lay down the effect of implementation deficiencies for each Question and specify whether the respective Principle should be regarded as fully, broadly, partly or not implemented.

At the end of each chapter there is also a list of the IOSCO detailed standards covered by the subject of the chapter, which either the Methodology is already based on or which may be consulted to find more detailed information on how to apply the Principle.