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The International Organization of Securities Commissions (IOSCO) today published a report on Risk Identification and Assessment Methodologies for Securities Regulators, which provides a practical overview of the methods, approaches and tools that IOSCO and securities regulators have developed to identify and assess emerging and potential systemic risks.
The IOSCO Committee on Emerging Risks prepared the report as part of the organization´s ongoing effort to identify, analyze, and monitor systemic risk. Following the collapse of Bear Stearns & Co. Inc. and Lehman Brothers Holding Inc. in 2008, the G20 and other international authorities agreed that securities regulators, and not just banking regulators, have a significant role in the identification of systemic risk.
Because securities markets are complex and involve a wide range of different types of intermediaries, products, and investors, the paper acknowledges that there is no one-size-fits all method for identifying trends, vulnerabilities and risks in these markets. Instead, it provides concrete examples of the different methods currently employed by the securities commissions who are members of the Committee on Emerging Risks.
The paper is organized around the following themes:
- Definition of Risk
- IOSCO Risk Identification Methods
- Risk Identification Methods used by Securities Regulators
- An Analytical Framework for Assessing Systemic Risks
Identifying, analyzing, and monitoring systemic risk is still a new discipline for securities regulators. Therefore this paper should be viewed as another step in the evolutionary work performed by securities regulators in this area. The methods described in this document will continue to evolve and, consequently, this paper will need to be updated or supplemented from time to time.
The paper shows that securities regulators increasingly are pairing qualitative risk analysis with quantitative tools. This tendency includes risk dashboards that systematically track quantitative risk indicators, as well as data analytics, econometrics and research that is focused on risk analysis of products, firms and markets, as well as incentives and investor behavior.
Background to the Report:
Following the outbreak of the current financial crisis, IOSCO adopted a new strategic direction that emphasized the need for securities regulators to identify, monitor and manage systemic risks. To that end, IOSCO established a research function comprised of a Research Department at the General Secretariat and the IOSCO Committee on Emerging Risks (CER). Monitoring risk is critical to fulfilling this function.
The IOSCO Research Department Staff Working Papers series can be found at http://www.iosco.org/research/?subSection=staff_working_papers .
