The study, which was released last week by a committee of the International Organisation of Securities Commissions (IOSCO), the world-wide forum of securities regulators, says that while the role of international financial markets in facilitating the financing of real economic activity is not in dispute, recent events have meant that "the conventional wisdom that has justified the manner in which the international financial system continues to operate" is being increasingly subjected to challenge.

Concerns involve "a whole host of issues that were previously considered either not significant or against the prevailing orthodoxy of unfettered markets and the power of pure market discipline," the study suggests.

The study goes on to note that the certain aspects relating to the general supervision, regulation and transparency of international financial activity should be strengthened.

For example, the study suggests that there is scope for greater consistency in regulation of financial activity across different asset markets. Using the example of over-the-counter (OTC) currency markets, it argues that "standards upholding [regulatory] objectives should be established and enforced in [all] markets, whether exchange- or OTC-based."

Similarly, the study highlights the apparent lack of transparency in which particular international investors conduct their activity. In raising concerns over asymmetric standards of disclosure and transparency that exist for different groups of market participants, the study argues that "issues of market integrity and systemic stability should … be equally factored into the regulation of market participants."

Entitled "The Causes, Effects and Regulatory Implications of the Financial and Economic Turbulence In Emerging Markets", the study examines issues raised by the East Asian crisis during 1997–98 primarily from the perspective of securities markets and their regulation. It draws various implications from the crisis, including a set of specific implications for securities market regulation.

"The study was released as an interim report of the Emerging Markets Committee (EMC) of IOSCO at the organisation's recently-held annual conference in Nairobi. It was prepared by the EMC's working group on secondary market regulation, which received a mandate from the EMC to pursue the study in November 1997. Findings—based on a survey of emerging markets not only in East Asia but also in Africa, Eastern Europe, the Middle East, South America and South Asia—were presented to the EMC in May 1998. The working group is chaired by the Malaysian SC."

SC Chairman Dato' Dr Mohd Munir Abdul Majid, who has chaired the EMC for the last two years and who was recently re-elected for another two-year term, said that the study "provides an important and timely analysis of the issues surrounding the East Asian crisis, and ranks among the best of other reports in this area. It is perhaps the only one so far in response to the crisis that examines these issues primarily from the viewpoint of capital markets regulation."

Dato' Munir pointed out that the study highlights key issues of concern for all financial regulators, not just those in emerging markets. "The East Asian crisis and the turbulence that has since engulfed other markets around the world has profound implications for the international financial community. The study recognises this, and provides a thorough and insightful analysis of the issues involved."

The study draws several major implications for securities regulation. In noting that markets are affected by a much wider range of factors than before, the study suggests that regulators "will have to be in a position to assess the nature of activity in markets and environments beyond those in which they have traditionally been involved" if they are to perform their functions effectively.

Under such circumstances, the study argues, systemic risk must be a key consideration for regulators. "All relevant supervisory agencies are likely to have to understand how and from where systemic risk arises, and work together in ensuring that the financial system remains secure," it says. Arrangements should facilitate systemic risk surveillance and the framing of an appropriate response to a major disruption, the study adds.

According to the study's survey results, the crisis highlighted the importance of co-ordination among national regulatory authorities both internationally and at home. In the case of domestic regulation, the study argues that co-ordination entails the establishment of an "appropriate set of regulatory priorities that, as much as possible, takes into account the needs of the entire domestic financial system." Difficulties in establishing them could ultimately have a negative impact on the market, the study warns.

The study sees front-line regulation by market institutions such as exchanges and clearing houses as a "valuable component" to the supervisory and enforcement role of the supervisory authority. But it argues that to the extent existing arrangements between supervisory agencies and front-line regulators need to be strengthened, "it may be necessary to have an explicit framework that articulates the role and functions of the market institution as a front-line regulator."

In the area of prudential regulation, the study notes that improving standards in emerging markets, "may not be entirely about raising the stringency of regulation but also about establishing an appropriate incentive structure for achieving acceptable standards." Given the dynamic nature of financial activity, the study highlights the benefits of a forward-looking risk-based approach to capital requirements.

The study recognises the tensions faced by emerging markets in market development and notes that, "amidst increasing financial globalisation and integration, these markets do not have the luxury of evolution." However, it warns that the costs of hasty development can be high and suggests that emerging market regulators have important roles in overseeing and facilitating the development of the securities industry and in contributing to the policy framework that determines the liberalisation of financial markets under their jurisdiction.

The study identifies "a confluence of factors" relating to macroeconomic, structural and financial-market issues that was likely to have been responsible for the crisis and for the events that subsequently occurred.

An interaction of macroeconomic factors—including capital flow surges, economic overheating and a loss of export-competitiveness—led to the increased vulnerability of an economy to financial crisis, the study suggests.

The study also identified a host of structural issues that were faced by emerging markets during the crisis, among them: issues relating to deregulation and liberalisation of the financial sector; the underdevelopment of debt markets; the regulation and supervision of financial institutions; disclosure and corporate governance; and lending distortions.

Currency and OTC market activity were among financial market issues identified by the study, as were various causes of financial contagion across particular assets as well as across countries.

In terms of the crisis' broad economic effects, the study raises some concern that more pessimistic views anticipate the possibility of global deflation. However, it points out that policy-makers in industrialised countries do have "room to manoeuvre in averting a global deflationary spiral … by reducing interest rates and expanding the money supply."

Among the major effects on securities markets, the study notes that, at the height of the crisis, most emerging markets suffered a sharp increase in capital outflows and higher costs of capital. "The international perception of greater risk with respect to emerging markets as a whole tended to worsen regardless of whether specific markets were actually caught up in the turbulence or not," the study suggests.

The study's survey showed that this was accompanied by higher price volatility, which exacerbated the financial weakness of market participants, and led to a disruption of market development in many jurisdictions.

The working group responsible for preparing the interim report—one of five working groups of the EMC—is headed by the SC. Over the past four years, this working group, which examines issues relating to the regulation of secondary markets, has studied and published reports on, among others, the legal and regulatory framework for exchange-traded derivatives, the legal and regulatory framework for clearance and settlement in emerging markets, and financial risk management in emerging markets.

IOSCO is a world-wide forum for securities regulators that addresses issues and demands related to the regulation of securities and futures markets. 94 national securities regulators form IOSCO's ordinary membership, of which 67 are currently members of the EMC. There are also 56 affiliate members and 10 associate members. SC joined the organisation in 1993 and was elected to chair the working group on the regulation of secondary markets in 1994. In 1996, Dato' Munir was elected by members of EMC to head the committee for a two-year term. At the recent annual conference of IOSCO, he was re-elected to the chair of EMC for a further two years.