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Regulatory Agencies 

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Regulatory agencies with oversight of financial markets and institutions are more frequently offering assessments of risk.  Risks identified by entities such as IOSCO, FINRA, and DTCC are more focused on financial market and sector imbalances. Below are some of the risks identified by those agencies.

International Organization of Securities Commissions

The four main risks identified and analyzed in depth in IOSCO Securities Market Risk Outlook for 2013-2014 relate to the following:

  • Risks related to low interest rate environment: Expansionary monetary policies have reduced interest rates to the point that real rates are at times negative. While these policies may help stimulate the real economy, spill-over effects may create potential risks for securities markets.
  • Risks related to collateral management: In response to global policy requirements, demand from investment firms, bank holding companies, and central banks for high-quality collateral has increased greatly and could impact pricing.
  • Risks related to derivatives markets: Risk has shifted from bilateral over the counter contracts to a single point of infrastructure (central counterparties).
  • Risks related to capital flows of emerging markets.

Depository Trust & Clearing Corporation

The key systemic risks facing the global securities industry as identified by the DTCC in Beyond the Horizon: A White Paper to the Industry on Systemic Risk are:

  • Cyber Security: This issue has emerged as arguably the top systemic threat facing global financial markets and associated infrastructures, including the threat of distributed denial of service attacks, attacks against systems containing transaction records, and risk of disclosure of restricted, confidential or material non-public information via compromise of internal systems.
  • Impact of New Regulations: The financial industry has expressed concerns that even though the regulations are well-intentioned and necessary, there is a danger that their scope and complexity may actually be creating unintended consequences or an entirely new set of risks.
  • Counterparty Risk: There is still ongoing industry debate as to whether the “too-big-to-fail” issue has been sufficiently resolved. Today, the top U.S. banks still control the vast majority of total assets within the sector and just a few provide some of the most critical services.
  • Collateral Risk: There are growing concerns globally about potential risks associated with a future shortage of high-quality collateral, possible pro-cyclical impacts of collateral requirements, along with operational challenges related to collateral management.
  • Interconnectedness Risk: Inter-linkages among financial firms and infrastructures greatly improve the effectiveness and efficiency of clearance and settlement activities and processes. They also create a complex network of interdependent legal, credit, liquidity, and operational risks. This presents a possible source of systemic risk by increasing the potential for operational and other disruptions to spread quickly and widely through the financial system in a worst-case scenario.
  • CCPs as Single Points of Concentration: More and more business is being forced through central counterparties, including DTCC.
  • Business Continuity Risk: The problems created by Hurricane Sandy are cited as an example.
  • Market Quality: DTCC points to the numerous compliance violations being cited by regulators and increased levels of fines and other penalties, which may be significant enough to drive firms out of business.
  • High-Frequency Trading: While DTCC acknowledges the benefits of the high-frequency trading, it also says that this activity creates technology risks.

Financial Industry Regulatory Authority

FINRA identified the following significant risks and issues that could affect investors and market integrity in 2014 Regulatory Examination Priorities:

  • Suitability issues
  • Conflicts of interest
  • Cybersecurity
  • Qualified plan rollovers
  • Initial public offering market
  • Private placements
  • Anti-money laundering
  • New municipal advisor rules
  • Crowdfunding portals
  • Senior investors
  • Fraud: Microcap and insider trading
  • Financial and operational: Funding and liquidity risk; risk control documentation and assessment; accuracy of financial statements and net capital; auditor independence
  • Market: Algorithmic trading and trading systems; high frequency and algorithmic trading abuses; audit trail integrity; best execution;