Iosco puts digital disruption high up the risk agenda

Iosco puts digital disruption high up the risk agenda

International securities regulatory body Iosco has identified the disruptive threats from technological innovation as a key risk factor facing financial markets in 2016.

While acknowledging the benefits presented by a host of new directions in technology, from distributed ledger tech to Big Data analytics, Iosco's 2016 Risk Outlook cautions that it is also important to consider the potential risks and vulnerabilities of digital disruption.

The industry body identifies five factors that could raise the risk profile for financial markets:

  • the concentration on usage of very specialized technological systems. For example, only a few providers in the world produce high-frequency trading (HFT) cables, which connect traders to exchanges. If these providers are breached in some way, numerous firms would be vulnerable;
  • the increasing complexity introduced by digital disruptors. This complexity may be difficult for investors, supervisors and/or regulators to disentangle;
  • the ambiguity of law surrounding digital disruptions. The pace of advancement can be difficult to keep up with, resulting in certain new financial products and activities entering the markets without regulatory oversight;
  • investor misunderstanding of the risk designs and limitations of innovative investment tools such as robo advisers;
  • new forms of harmful behaviour facilitated through innovation in digital channels, e.g., cybercrime and market manipulation through propagation of rumours via social media platforms and online chat rooms dedicated to trading activity.
"From a regulatory perspective, digital disruption may impact the objectives of investor protection and also affect market development and efficiency," states the report. "The mitigation of systemic risk in securities markets raises questions about technology different than those coming from a business perspective."

These include:
  • How is technology facilitating/suppressing the sound growth of financial markets?
  • How can we ensure that the increased financial access that technology affords does not come at the price of investor protection?
  • How is technology increasing the global interconnection of financial markets, and do we need to change how we think about contagion risk?
  • What kinds of product innovations does technological integration support, and are monitoring and surveillance technologies able to keep up?
"The new forms of harmful behaviours facilitated by digital innovations are especially relevant, considering the increasing cyber risk facing securities markets, and the way the securities regulators deal with these risks," the report states.

Iosco's focus on emerging technology comes just days after the Financial Stability Board warned that the regulatory framework may have to be adjusted to meet new risks created by the growing number of startups looking to disrupt traditional banking business.

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