The New Internationalism? IOSCO, International Standards and Capital Markets Regulation

Abstract

The international reach of the financial crises of the last 20 years has triggered an explosion in international standards setting, creating a complex dynamic between national (or regional) regulation and international norms, between hard and soft law. This paper explores this phenomenon as it relates to capital markets by looking at the changing role of the International Organization of Securities Commissions (IOSCO), the standard setting process itself, issues associated with implementation of international standards and possible alternatives. In deciding that standard setting is its primary mission, IOSCO has assumed a role internationally of “quasi-regulator”, in much the same way (and for the same reasons) as the now defunct EU Committee of European Securities Regulators (CESR). Potentially, this new role puts IOSCO on a collision course with powerful state-level regulators. A further complication is the standard setting process itself. The academic discourse has focussed on the normative force of international standards, without paying much attention to the actual content of the standards or the process by which they come into being. Hegemonic powers, of course, play a disproportionate role, but there are a large number of other factors which determine their shape and substance. In order to shed new light on the standard setting process, this paper takes a close look at how one specific set, those relating to credit rating agencies (CRAs), has come into being. The results are surprising: in the face of a particular domestic regulatory failure, a series of international codes and principles concerning CRAs were developed by IOSCO. These international standards apply virtually exclusively to three US corporations - S&P, Moody's and Fitch - which together control over 95% of the international and 98% of their domestic market. Even more curiously, the CRA codes and principles, despite their inapplicability in most parts of the world, have been widely adopted and implemented. The responsibility for this waste of time and regulatory resources can be laid, in part, at the door of the IMF and the World Bank. Together with IOSCO and its taskmasters, the Financial Stability Board and the G20, the IMF and the World Bank appear to ignore the selective nature of globalization. Yet, there remains a great demand for international financial standards, especially among smaller or emerging economies. The paper concludes with some suggestions on future courses of action, in the face of the new internationalism.