March 8, 2016

Overview of the IOSCO Securities Markets Risk Outlook 2016

iStock_000007650054_Full.jpgThe International Organization of Securities Commissions (IOSCO) just released its view regarding significant potential threats to financial stability. The IOSCO has identified four main areas of potential risksThe International Organization of Securities Commissions (IOSCO) just released its view regarding a significant potential threat to financial stability. The IOSCO has identified four main areas of potential risks:


  • Corporate bond market liquidity:

The recent turmoil in US High Yield corporate bonds, characterized by the funds redemptions run has raised some concern about the capacity of this markets ability to sustain a long period of stress.  The very low rates environment emphasized the herding effect by investors who are searching for yields, as well as regulatory constraints (Solvency II) pushing institutional investors to buy government bonds. Banks have dramatically reduced their market-making and proprietary portfolio activities, which further contributes to a substantial reduction in financial market liquidity.


  • Risks associated with the use of collateral in financial transactions:  

Regulatory reforms such as the Dodd-Franck act and EMIR in Europe have transformed collateral management into a series of complex and costly challenges.  The need for urgent access to high quality assets and a risk/return optimization has contributed to an increase in the securities services offering by non-banking institutions such as ICSD or global brokers/dealers.  The IOSCO underlines the following services such as collateral optimization, collateral transformation, collateral arbitrage, re-hypothecation and reuse will continue to increase, and may create the potential of risk concentration in those participants that provide such services. Of course, transparency and standardization of the derivatives transactions, as well as CCPs involvement will mitigate counterparty risk compared to bilateral (OTC) transactions.


  • Harmful conduct in relation to retail financial products and services:

The internal code of conducts and governance regarding business with retail clients, has been highlighted by national authorities and regulations such as the MiFiD or UCITS directives.   Retail clients should also be informed and educated in order to have a responsibility when investing in financial products, complex or not.  As emphasized by IOSCO, “A frequently cited case involves the mis-selling of unit-linked products and structured retail products. These products are inherently complex and many investors and advisers fail to understand them sufficiently. High commissions on these sales also can drive investment advisers to “push” these products, to the detriment of some investor classes.”  Margin squeeze in the banking sector could partially explain a push towards high fees products, these include structured and equity linked products compared to bonds or plain vanilla products. 


  • Cyber threats:

Finally, the IOSCO pointed out, “In securities markets, cyber threats have increased in frequency, sophistication, and complexity over the past few years and have become a systemic risk.  Securities markets regulators around the world are focusing on mitigating cyber risks and increasing the cyber resilience of financial systems”.  All financial institutions take this risk very seriously and in doing so, have increased their security to prevent cyberattacks.


Risk Dynamics can assist you in strengthening your risk management and risk appetite frameworks to manage above financial and non-financial risks challenges in order to identify, assess and mitigate their impact.



About the Author: 

Franz Kerstens is Senior Advisor at Risk Dynamics. Within Risk Dynamics, Franz focuses on regulation, portfolio strategy, investment process, stress tests, as well as portfolio optimization for banks, insurance companies, asset managers, pension funds with strong emphasis on risk management. Click here to email Franz.


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Tags: Financial Market Infrastructure


Franz Kerstens

Franz Kerstens

Franz is an experienced Senior Advisor (25 years in the financial sector) with proven abilities in financial markets and projects, integration programs related to risk management (operational and global financial markets risks as well), private wealth management, in a multi-cultural, international environment. Franz has a deep and extensive knowledge of Treasury Management (proprietary trading) and Asset Management (fund set up, regulation, marketing, management). He has developed transversal skills and ability to embrace all the dimensions of complex issues, in a very analytical and structured way for financial institutions, and also financial departments of commercial or industrial companies. People manager as well, he demonstrates an acurate capability to drive change and motivate people towards result achievement. Looking for value creation, influencing and shaping of the future of companies.