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The International Organization of Securities Commissions (IOSCO) published today the consultation report A Comparison and Analysis of Prudential Standards in the Securities Sector, which undertakes a high level comparative analysis of the key prudential/capital frameworks for securities firms.
The report seeks to highlight similarities, differences and gaps among the different frameworks. IOSCO´s objective is to update its 1989 Report on Capital Adequacy Standards for Securities Firms (Capital Standards Report), based on the issues identified in the consultation report published today.
The report´s comparative analysis focuses on the Net Capital rule (NCR) approach, in particular the US approaches, and the Capital Requirements Directive (CRD), which is founded on the Basel Committee approach. While focusing on those two main prudential frameworks, the report also recognises relevant national variations.
As stated in the 1989 IOSCO Capital Adequacy Report, “capital adequacy standards foster confidence in the financial markets and should be designed to achieve an environment in which a securities firm could wind down its business without losses to its customers or the customers of other broker-dealers and without disrupting the orderly functioning of the financial markets. Capital standards should be designed to provide supervisory authorities with time to intervene to accomplish this objective. They should allow a firm to absorb losses. They also should provide a reasonable, yet finite, limitation on excessive expansion by securities firms to minimize the possibility of customer losses and disruption of the markets.”
Many of the key themes identified in the consultation report are already reflected in the existing IOSCO capital adequacy standards report, such as the need for minimum capital requirements that reflect the type of business being conducted by securities firms and for risk-based capital requirements.
The report highlights prudential regulatory and supervisory areas that might be considered in any update of the 1989 Capital Standards Report, particularly:
- to identify opportunities for regulatory capital arbitrage that might (or actually have) materialised from differences in prudential regulations across jurisdictions;
- to account for the increasing use of internal models and the commensurate increase in infrastructure, systems and controls that are necessary to help ensure that firms are not undercapitalized compared to the risks posed by their positions and activities.
The report also includes three questions on which IOSCO is seeking public comments:
- Does the report cover all of the key issues on prudential standards in the securities sector? If the answer is no, please explain what other issues should be covered.
- A primary aim of this report was to undertake a comparative analysis of the key prudential/capital standards for securities firm. Does the report identify and analyse the main similarities, differences and gaps between different prudential frameworks?
- In light of the findings in this report, which areas of the 1989 document, if any, do you believe should be updated and/or amended?
Comments should be submitted on or before 10 June.
