Capital Markets Exploding. LEIs Needed So They Dont Blow Up.
December 11, 2012
In 20 years, there are likely to be 20 different centers of capital markets worldwide, according to David Wright, the secretary general of the International Organization of Securities Commissions.
And to control the risks of daily interactions at high speed in high volumes between markets in these “20x20” markets, a key, he says will be: Legal entity identifiers for all participants.
Driving the need: Emerging markets ranging from India to Indonesia.
These are “big and growing fast,’’ at an average rate of 5% or 6% a year, he said. To keep that economic growth going, they will be focused on established stock markets for raising capital to fund new companies and accelerate the growth of existing ones.
"They all get it,’’ Wright said. “They all realize they have to develop their domestic capital markets if they're going to develop their economies."
This means the U.S.-Europe axis of capital markets will be replaced by “many more big capital markets” not just in China, but in places like Indonesia, Russia and Turkey.
Just as critically, global regulators, as a result of the credit crisis that is now, in effect, in its sixth year, will continue to be clamping down on the operations of commercial banks in Western countries. Higher capital set-aside requirements will limit their ability to fund growth through lending.
“Market-based financing will fill the void,’’ he said at a conference on the establishment of the global legal entity identifier system held at offices of the Securities Industry and Financial Markets Association in lower Manhattan.
When 20 market centers are sending huge order flows to 20 other market centers, the “amplification of contagion” will be much bigger than what was seen in the credit crisis that started in 2007.
That means that market participants will need to be identified with clear legal entity codes, so exposures between parties can be watched as they build up, as well as signs of system-wide exposures to compounding risks.
“This will help identify those risks,’’ he said.
Last time around, the industry “did a poor job of identifying risk in the global financial system,’’ he said.
Twenty years from now, a worse “contagion,’’ he said, has to be identified and stopped, before it spreads.
IOSCO has 200 members, among the world's securities regulators. From the United States, these include the Securities and Exchange Commission and the Commodity Futures Trading Commission.