(The article featured below is a selection from International Securities and Financial Reporting Update, which is available to subscribers of that publication.)

IOSCO Head Discusses Virtual Super Regulation

The best way to predict the future is to invent it, said the chair of the Int'l. Organization of Securities Commissions ("IOSCO"), Jane Diplock, during a speech on global securities perspectives. She was quoting U.S. computer scientist Alan Kay, adding that she believes regulators have the capacity to invent the future of securities markets regulation. In her view, the world is moving toward virtual super regulation, where instead of a super regulator at the global level, various agreements form international thinking and practice.

Today's markets are truly global, according to Diplock, with an increasing interdependence of markets in different national jurisdictions. Exchanges have also changed greatly, through technology and through their ownership structure, she added. With demutualization, exchanges are now motivated by maximizing shareholder returns, and they compete to capture the broadest customer base through alliances, host relationships, franchises and mergers, according to Diplock. The motivation of the exchanges is to meet the demand for ever more cost-effective trading, she noted.

Diplock believes that calls for a super regulator are impractical, since it would require domestic regulators to cede authority to an international body. She continued in the speech by outlining what form global regulation might take, calling it virtual super regulation.

By virtual super regulation, Diplock means the sum of the recognition agreements entered into by the major capital markets of the world. IOSCO's 30 broad principles and its multilateral memorandum of understanding are at the center of these arrangements, and mutual recognition agreements are gaining acknowledgment as a solution for effective regulation in a world of cross-border trade. Mutual recognition allows domestic laws and regulations to reflect national imperatives while providing the capacity for cross-border cooperation and enforcement. The first step in achieving mutual recognition is for the countries involved to agree on a common basis of principles, and the IOSCO principles provide such a basis, Diplock feels.

There have been a number of noteworthy mutual recognition steps recently. She highlighted the memorandum of understanding in 2006 between the U.S. Commodity Futures Trading Commission and the U.K. Financial Services Authority (recently updated). A number of similar agreements exist within the European Union. The U.S. Securities and Exchange Commission announced in March a series of actions to further mutual recognition with a number of countries, including Australia, Canada and the EU. In August the SEC signed a mutual recognition agreement with Australia, which provides a framework for regulators in both countries to consider exemptions that would permit exchanges and broker dealers to operate in both jurisdictions, without the need in certain aspects for separate regulation by both countries. Diplock noted that processes are underway for similar agreements between the U.S. and both Canada and the EU. Australia and New Zealand recently introduced mutual recognition of securities offerings.

In the Asia-Pacific region, IOSCO is working on an opt-in scheme for mutual recognition of general/non-specialized collective investment schemes offered to non-retail investors. Diplock called this an important first step to possible wider arrangements. She noted that all the arrangements are based on an understanding of the importance of local regulation and cooperation between regulators.

While applauding the work toward a single set of Int'l. Financial Reporting Standards ("IFRS"), she is concerned that the progress will be reduced if different interpretations of IFRS spring up around the world. IOSCO has stated that national variations must be clearly disclosed, and Diplock believes more work is needed to ensure the sharing of views on IFRS. She also applauded recent efforts in the U.S. to work toward the use of IFRS by U.S. issuers beginning in 2014.