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European Affairs
Letters to the Editor
It Is Widely Agreed that Markets Need Rules
Andre Icard's recent article, "The World Financial System has Weathered Unprecedented Shocks," which commends the resilience of the economy and the world's financial system, makes some compelling points about the need for continuing vigilance to assure resilience is maintained. It is encouraging that although economics is the "dismal science," the global economic outlook projected by economists need not be dismal, and that globalization advocates, and advocates of capital market development generally, can continue to meet the opposition with examples of real improvement rather than rhetoric.
From the perspective of a long time public sector participant in the oversight of the financial services community, it seems worthy of note that beyond the litany of examples cited, and the beneficial effects of market discipline, the global political and financial community also made a strong commitment following the Asian Crisis to improve infrastructure for capital markets. To do so, they undertook to specify the key standards and codes fundamentally related to eliminating vulnerabilities and meeting developmental needs, as well as promoting the ongoing objectives of investor protection, fair, transparent and efficient markets and the reduction of systemic risks.
In particular, the Financial Stability Forum, a group of finance ministers, central banks, national regulators and international institutions and standard setters, identified 12 originally (now 13) key standards and codes for sound financial systems. These codes address monetary and financial policy, fiscal transparency and data dissemination (the IMF Code of Good Practices), insolvency (not finalized), corporate governance (the OECD Principles of Corporate Governance), accounting, auditing, payment systems (CPSS Core Principles for Systemically Important Payment Systems), securities clearing and settlement systems (CPSS/IOSCO Recommendations for Securities Clearing and Settlement Systems), banking supervision (the Basel Core Principles for Effective Banking Supervision), securities regulation (the IOSCO Objectives and Principles of Securities Regulation), insurance supervision (the IAIS Insurance Supervisory Principles), and market integrity (the Financial Action Task Force AML and Anti-Terrorist Financing Recommendations).
There is currently widespread dialogue among countries on how best to meet these standards and codes within the context of national legal systems, taking cognizance of the level of complexity and the stage of market development they have achieved to date and of the views of the other countries involved in the standard development process. This dialogue is occurring in conjunction with three other developments:
Efforts by the International Monetary Fund and the World Bank to assess the financial infrastructure of countries pursuant to these codes and standards within the Financial Sector Assessments Program
The issuing of further guidance by the various expert standard setters and in some cases, the provision of individual counsel to jurisdictions through related peer-type reviews
The acceleration of many national initiatives, inspired by the further articulation of the framework of the European markets and movement by the EU accession countries to meet European standards, by pressure for effective anti-money laundering and anti-terrorist financing arrangements, by the development of new types of regional inter-linkages, and, also of course, by competition.
In other words, while there may be some quibbling about the details - or about how flexible the structure should be - there is now global consensus at the expert and political level that an adequate regulatory infrastructure is important to capital market development and to confidence in the fair, effective and safe functioning of those markets.
There is also consensus that how you measure performance, and confidence in the reliability of those measurements, is important. That is to say it is agreed that accounting matters - even if there is not always agreement on the methodology of measurement.
Furthermore, consensus is emerging that in a more transparent, more complex and increasingly borderless (from the point of view of access and impact) marketplace, regulators must share oversight, and financial firms and participants must take on real accountability for managing their risks and preventing misconduct within an appropriate framework. There is also the emerging view that regulatory as well as criminal enforcement against misconduct is important and should be swift and assured.
These developments should not only reinforce a needed lack of complacency about, and needed community responsibility for, a properly functioning international financial system, but also may help to recapture a mood of optimism about the ability of the markets to serve, not defeat, important social goals. The codes make clear that equity of access and application of market rules, fairness and transparency are part of efficient and liquid marketplaces as they are a part of social fairness generally.
Andrea M. Corcoran
Director of the Office of International Affairs
U.S. Commodity Futures Trading Commission
(Note: The views expressed in this letter are personal and do not reflect the views of the Commission, any Division, Office, or member of the Commission's staff.)
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