IOSCO Eyes Conduct in 2016 Risk Report

IOSCO (the International Organization of Securities Commissions) flagged conduct as one of four key areas of market risk in the coming year.

In its Securities Markets Risk Outlook 2016, IOSCO looked at corporate bond market liquidity, the use of collateral in financial transactions, and cyber threats as other main sources of risk.

Addressing conduct risk, IOSCO cited miss-selling of unit-linked products and retail structured products, noting that “many advisers fail to understand them sufficiently”, and “high commissions on these sales also can drive investment advisers to ‘push’ these products, to the detriment of some investor classes”.

Regarding bond market liquidity, IOSCO said growth of corporate bond primary markets had raised concerns about the secondary market’s ability to withstand market stress, and more data on its impact would be needed.

Turning to the use of collateral, which was also a focus of IOSCO’s 2015 report on securities markets risk, it said the increased deployment of collateral management activities could have “inherent risk transfer …, lead to greater market interconnections, have greater asset encumbrance (in some circumstances) and may create the potential of risk concentration in those participants that provide such services”.

The fourth area – cyber threats – presents systemic risk due to the increased “frequency, sophistication and complexity” of attacks, according to IOSCO. “Securities markets regulators around the world are focusing on mitigating cyber risks and increasing the cyber resilience of financial systems,” it said.

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