The International Organization of Securities Commissions (Iosco) published today a Consultation Report on Regulatory Issues Raised by Changes in Market Structure, which identifies possible outstanding issues and risks posed by existing or developing market structures. It also provides recommendations to address these potential risks.
At its summit meeting in 2010, the G20 requested that IOSCO "develop recommendations to promote markets´ integrity and efficiency to mitigate the risks posed to the financial system by the latest technological developments." This consultation report forms part of IOSCO´s response to that request.
In the report, IOSCO seeks to gather evidence and views for developing recommendations that promote market liquidity and efficiency, price transparency, and investors' execution quality in a fragmented environment. The report proposes possible policy options and regulatory tools to cope with the potential drawbacks arising from market fragmentation.
The report concludes that securities regulators bear the responsibility for striking an appropriate balance between a market structure that promotes competition among markets, and one that minimizes the potentially adverse effects of fragmentation on market integrity and efficiency, price formation, and best execution of investor orders.
Accordingly, it says, an appropriately balanced market structure must provide for strong investor protection, foster fair and efficient capital markets and confidence in those markets, and enable businesses to raise capital for the benefit of the overall economy.
The report takes into account the previous analyses and recommendations by IOSCO in other related areas. Specific reference is made to the IOSCO 2011 Report Principles for Dark Liquidity and the 2011 Report on Regulatory Issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency, as well as to the recently published consultation report on Technological Challenges to Effective Market Surveillance Issues and Regulatory Tools.
It also updates the 2001 IOSCO report on Transparency and Market Fragmentation, to the extent that it provides an overview of the current state of market fragmentation and regulatory steps taken since 2001 in various members' jurisdicctions.
The analysis carried out for the report included the following fact finding exercise:
• A mapping of the various types of trading spaces in different jurisdictions;
• An overview of the regulations and rules that apply to the various types of trading spaces and ultimately the factors that fostered the establishment of multiple trading spaces for the same product;
• An analysis on how liquidity has been dispersed among these different trading spaces in equities and Exchange Trade Funds (ETFs), and
• A dialogue with the industry, including consultation with the relevant IOSCO committees.
The report makes recommendations to monitor the impact of fragmentation on the following areas:
• market integrity and efficiency
• trade information
• on order handling rules and best execution
• on access to liquidity
• market efficiency and resilience
The closing date for comments to this consultation is 10 May 2013.