trends and risk in global securities markets - iosco...trends and risks in global securities markets...

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Trends and risks in global Securities Markets

Shane Worner Senior Economist

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Disclaimer The views and opinions presented in this presentation are of the

presenter only and do not necessarily reflect the views and opinions of IOSCO or its individual members.

All information presented in this document is strictly confidential

and cannot be reproduced without the expressed permission of the IOSCO Research Department

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Content

1. Trends and risk

Introduction

Main trends and potential vulnerabilities

Potential sources of systemic risk

2. FX benchmarking

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Content

1. Trends and risks

Introduction


Potential sources of systemic risk 2. FX benchmarking

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Introduction

• In an environment of accommodative monetary policy globally

• Importance of securities markets growing, so are the risks

• Other global organizations have recognized this

• More data on trends, but big data gaps frustrate analysis on main risks

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Content

1. Trends and risks

Introduction



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1. Monetary policy is impacting securities markets… Official interest rates Balance sheets of central banks in % GDP

Source: Bloomberg and Thomson Datastream

0

1

2

3

4

5

6

Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

Euro areaUSJapan

0

5

10

15

20

25

30

35

40

45

50

ECB FED

BoJ

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2. Loan provision to the real economy… Bank credit to non-financial corporations, outstanding

Source: BIS

0

2

4

6

8

10

12

14

16

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

US$

trill

ions

EU US China

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0

1

2

3

4

5

6

7

8

US$

trill

ions

EU US China

Corporate bonds, non-financial corporations, outstanding

3. Increasing importance of securities markets

0.00

200.00

400.00

600.00

800.00

1,000.00

1,200.00

2011 2012 2013 2014(annualised)

$US

(bill

ions

)

Total Value of ISPO

Equity markets, Global ISPO issuances

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Main trends and potential vulnerabilities 4. Innovation is happening…

0

1,000

2,000

3,000

4,000

5,000

6,000

2007 2008 2009 2010 2011 2012 2013 2014

$U

SD M

illio

ns

New loan origination Annualised estimateData as at Feb-2014

P2P loan market, global new loan origination P2P loan market , outstanding loans

USA

China

UK

Germany

France

Poland

Finland

The Netherlands

Denmark

Italy

Sweeden

Estonia

S. Korea

Spain

Total: $US 9,000,000

Data as at Feb-2014

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5. Asset price valuation is increasing…

Liquidity in markets drive prices of securities:

• Equity markets: statistical measures show upward trend of valuation is main markets, especially those with QE: US (+2 SD); Europe (=), HK (- 1 SD), AU (-0.5 SD).

• Corporate bond markets: US spreads with Treasuries decreasing and at very low historical levels

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Main trends and potential vulnerabilities 6. Some real estate markets and real estate investment trusts

could be vulnerable… Aggregate growth post crisis in the housing market Developed markets Emerging markets Source: Global Property Guide

-60

-40

-20

0

20

40

60

80

100

120

140

HK

SG AT TWIL NO CA NZ

EE AU FI SE UK IS CH DE JP KR FR DK

US SK NL LT ES GR IE

%

-40

-30

-20

-10

0

10

20

30

40

50

60

MY TR CN PH AE ID BR TH RU UA BG

%

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Main trends and potential vulnerabilities 7. Chinese wealth management products are potentially

vulnerable…

Concerns Numbers issued and outstanding • Quality and transparency • Size • Rapid growth • Lack of regulation • Interrelation with the banking system Source: Wind Information

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6. Derivatives markets are still growing and clearing is increasing… Notional outstanding of OTC Derivatives markets Clearing of IRS and Credit Derivatives (US only)

Source: BIS Source. CFTC

0

100

200

300

400

500

600

700 US$ trillions

Foreign exchange contracts Interest rate contractsEquity-linked contracts Commodity contractsForwards and swaps

0%

10%

20%

30%

40%

50%

60%

70%

0%

10%

20%

30%

40%

50%

60%

70%

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr-1

3M

ay-1

3Ju

n-13

Jul-1

3Au

g-13

Sep-

13O

ct-1

3N

ov-1

3D

ec-1

3Ja

n-14

Feb-

14M

ar-1

4Ap

r-14

% o

f mar

ket c

lear

ed

% o

f mar

ket c

lear

ed

IRS Credit

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Content

1. Trends and risks

Introduction



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Potential sources of systemic risk 1. The search for yield and the return of leverage and complexity

in the financial system. Systemic risk can be building up. Markets can destabilize markets when interest rates go up.

Increased risk taking

(Near) all time highs for: high yield bonds issuance; subordinated bonds; CoCo´s; covenant-lite bonds; PIK bonds; leveraged loans

Leverage

(Near) all time highs for: margin debt; LBO´s

Leverage and complexity

(Near) all time highs for: CDO´s (incl. CLO´s)

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Potential sources of systemic risk 2. Capital flow volatility in EM has calmed during the last year but

remain a point of risk entry, especially in the case of interest rate adjustments in developed markets.

• EM reliance on non-banks flows is higher than bank flows • Portfolio flows are small compared to FDI • Most EMs showed temporary volatility after the tapering announcement, but several

suffered slowing GDP growth • Prices EM Equity below DM; prices EM bond converging with DM

In case of an interest rate adjustment/change monetary stance in DM: • Monetary and fiscal positions (reserves, debt, trade balance etc.) matter • Political instability and structural reforms make difference • Macro-prudential policy measures in place in monetary sphere • Little is known about measures and their effectiveness in securities markets space

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Potential sources of systemic risk 3. CCPs have developed business models and risk management

procedures that seem robust. However, risks are: • the inherent pro-cyclicality of margin calls;

• the widespread use of similar risk management models;

• the varying levels of capitalization and profitability of CCPs to withstand a non-default event;

• the failure of clearing members and the structure of default waterfalls;

• risk related to:

– the investment policies of CCPs;

– the acceptance of collateral of varying quality;

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Potential sources of systemic risk 4. Re-hypothecation and collateral transformation practices are

sometimes off-balance sheet. This lack of disclosure makes it hard to assess these activities and can contribute to the risk of the financial system.

• Data gathering on collateral holdings is hampered by lack of disclosure, market intelligence is advancing slowly

• It makes it hard to assess whether there will be shortage

• It makes it hard to assess where the risks are pooling/moving

• Especially in cases when volatility gets back into markets and correlations move…

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Potential sources of systemic risk 5. Corporate governance failures have been cited for

contributing to the financial crisis and the more recent Libor scandals.

Concerns with:

• Board and managerial quality

• Shareholder involvement/activism or lack of

• Risk management and quality controls

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Content

1. Trends and risks

Introduction



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FX Benchmarking

• Unlike Libor, FX benchmarks are based on transactional data

• Concerns about integrity of FX benchmark especially around fixing time

• Benchmarks used for a variety of purposes.

• The issues were: • Clients using an fx benchmark rate, cause trade concentration around the fix time

• Dealers promising to execute at an unknown rate

• “Manipulate” benchmark to receive positive outcome

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FX Benchmarking

• Final FSB report published on 30th Sept 2014 with 15 recommendations including: • Fixing window be expanded to five minutes

• Increase data feeds to capture more of the FX market around fixing time

• Support industry initiatives to develop infrastructures for fixing trades

• Establish and enforce internal controls

• Market-makers should not share information

• And others…

• IOSCO led assessment against benchmarking principles concluded • Further work to do in implementing principles

• Further review in 2015

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