International Financial Standards: An Argument for Discernment

Policy Brief No. 135 — August 2018

International Financial Standards: An Argument for Discernment Cally Jordan

Key Points →→ Multiple shocks have led regulators and policy makers to put increasing faith in the diagnostic and prophylactic powers of international financial standards, but the nature, appropriateness and normative force of such standards varies. →→ As a standard setter, the International Organization of Securities Commissions (IOSCO) has pursued global consensus, harmonization and international best practices for many years. →→ Recently, however, the internationalization of US issues and standards by IOSCO has been disrupted by rising EU regulatory action and associated unilateralism. →→ Whereas international standards are often created under suboptimal conditions by actors with a broad range of motivations, assumptions and biases, frictions between state-level regulation and international standards can undermine their effectiveness. →→ Greater discernment should be exercised by state-level policy makers, international financial institutions and the international organizations themselves in proposing, deploying and implementing international standards.

Introduction Multiple shocks in the world economy over the last 20 years have led financial regulators and policy makers to put increasing faith in the diagnostic and prophylactic powers of international financial standards. International financial standards have proliferated, setting up a complex dynamic between national (or regional) regulation and international norms, and between hard and soft law.

The standards (and their standard setters) tend to be viewed monolithically, given equal weight and credibility. In fact, international financial standards vary greatly, depending in part on the standard setter responsible for their form, content and propagation.

International financial standards rarely represent optimal solutions, as would operate in an ideal world. They can be seriously compromised from the start, reflecting deference to powerful actors and the difficulties associated with addressing internal dissension among participants in the process of creating them. Participants bring to the process a broad range of motivations, assumptions and biases. Sometimes international standards are not international at all, but rather thinly disguised domestic regulations masquerading as international best practice.

About the Author Cally Jordan is a CIGI senior fellow with the International Law Research Program and a senior research fellow at the C.D. Howe Institute (Toronto). She is a full-time faculty member at the Melbourne Law School (Australia), where she teaches corporate governance, international capital markets, corporate law and comparative law.

Cally has spent more than 20 years working in various capacities with the World Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and other international organizations.

Over the years, Cally has taught and visited at McGill University, the University of Florida, Duke Law School, the Center for Transnational Legal Studies (London), the Max Planck Institute for International and Comparative Law (Hamburg), the London School of Economics and Political Science, the British Institute for International and Comparative Law (London) and IUC Torino. She was the inaugural P.R.I.M.E. Finance (Lord Woolf) Fellow at the Netherlands Institute for Advanced Studies (Wassenaar, Netherlands) and a Dean’s Visiting Scholar at Georgetown Law Center in Washington, DC. In 2018, she will be a visiting fellow at Harris Manchester College, Oxford, and the London School of Economics and Political Science.

Cally is the author of International Capital Markets: Law and Institutions (Oxford University Press, 2014). She holds degrees in both civil law and common law (LL.B./B.C.L., McGill University; D.E.A., Université de Paris I [Panthéon-Sorbonne]), which she obtained after earning a B.A. with distinction (Carleton University) and an M.A. (University of Toronto). She has practised law in Ontario, Quebec, California, New York and Hong Kong, most notably with Cleary Gottlieb (New York).

In a search for greater normativity, international standards may also assume the granularity of specialized regulation, especially in a technical area such as capital markets. Standard setters, too, may have their own ambitions, making use of their activities to assert a quasi-regulatory status.

In each case, dissonance between international norms and state-level regulation may result, undermining a central tenet of international standard setting, that is, the convergence and harmonization of state-level regulation.

That harmonization and convergence are desirable, indeed inevitable, has long served as the raison d’être for international financial standards. Once an unshakeable conviction, at least in certain quarters of the globe, such a contention is now a more contestable proposition.

Take, for example, these comments by Daniel Gallagher, a former commissioner of the US Securities and Exchange Commission (SEC), to a recent international gathering of capital markets regulators: “‘Harmonization,’ unfortunately, has become a euphemism for forcing nations to accept a unitary set of regulatory standards created by international bodies such as the Group of Twenty, the Financial Stability Board and IOSCO. To be blunt, it is the height of regulatory hubris to assume that not only is there a single regulatory solution to a problem, but that simply by banding together in international forums, we imperfect regulators can find that perfect solution.”1 Yet standard setting proceeds apace. International financial standards continue to be widely implemented, in various guises, on a state-by-state basis, with few questions asked. Organizations such as the International Monetary Fund (IMF) and the World Bank continue to participate in setting the standards, as well as deploying and propagating them in assessment exercises.

1

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Policy Brief No. 135 — August 2018 • Cally Jordan

Daniel M Gallagher, “Closing Remarks at the SEC’s 24th Annual International Institute for Market Development” (delivered at the US SEC, Washington, DC, 16 April 2014).

IOSCO as a Standardsetting Organization “[F]ollowing the financial crisis, [the Financial Stability Board and IOSCO] have taken on a new and more opaque character, and in some cases they have attempted to arrogate to themselves regulatory powers that properly reside with sovereign governments.” (US SEC Commissioner Gallagher, April 16, 2014) Having emerged as a focal point for the oversight of international capital markets, IOSCO now identifies itself as a standard setter.

Constituted in 1983, IOSCO began as a venue for cooperation and coordination, formal and informal, among state-level regulators; standard setting was not part of its remit.

IOSCO rose from relative obscurity to prominence in the aftermath of the 1997 Asian financial crisis when it turned to standard setting.2 The Objectives and Principles of Securities Regulation (1998, 2004, 2010) remain IOSCO’s best-known standards, but a raft of principles, guidelines, methodologies, codes, consultation papers and implementation reports followed.3 IOSCO standard setting had early on attracted the attention of other international bodies: the Group of Seven (and successors), the Financial Stability Forum (FSF) and its successor, the Financial Stability Board (FSB), the IMF and the World Bank. At the time, these international institutions were collaborating to create financial assessment “tool kits” to be used in diagnostic and prophylactic exercises conducted on a country-by-country basis. The IOSCO Objectives and Principles suited their purposes and, in this way, IOSCO was drawn, like it or not, into the ambit of international policy networks.

2

See the IOSCO home page (www.iosco.org) where the banner reads: “The global standard setter for securities market regulation.”

3

By the author’s calculation, IOSCO has produced some 555 public reports since 1989, including 362 final reports and 115 consultation reports.

IOSCO, however, is neither a regulator nor a treaty organization; it is a constellation of statelevel regulators, market institutions and, more recently, international financial organizations.4 IOSCO strives for consensus and comes under the disproportionate influence of the most politically powerful members. Within the organization, the balance of power can shift with changing membership patterns. Internal dissension may result in ineffectual action.

Although IOSCO standards, of every ilk, are hugely influential, hard questions should be asked about their effects and their effectiveness.

The Curious Case of Credit Rating Agencies One particular initiative illustrates the trajectory, and some of the anomalies, of IOSCO standard setting. IOSCO has allocated significant resources to the consideration of credit rating agencies (CRAs), developing high-level principles in 2003 and three successive CRA codes of conduct (2004, 2008 and 2015), publishing consultation reports, creating a task force on CRAs, positing implementation studies, creating CRA councils of supervisors and, within IOSCO itself, establishing a permanent CRA Committee. CRAs constitute a curious case in terms of international standard setting.

By the early 2000s, IOSCO had taken notice of several issues associated with CRAs for many years in the United States.5 Prompted to action, IOSCO internationalized these issues in September 2003 with the publication of a set of high-level principles (the IOSCO CRA Principles) and an accompanying explanatory report.

Both the report and the IOSCO CRA Principles came out of IOSCO’s Technical Committee, long dominated by the SEC and its staffers. The report noted the increased and often contentious importance of credit ratings. It also noted that CRAs produced their ratings in relative obscurity; investors and issuers could not see the rating

4

See Anne-Marie Slaughter, A New World Order (Princeton University Press, 2009) for a discussion of transnational legal ordering; see also Hannah L Buxbaum, “Transnational Legal Ordering and Regulatory Conflict: Lessons from the Regulation of Cross-Border Derivatives” (2016) UC Irvine J International Transnational & Comparative L 91.

5

See Frank Partnoy, “How and Why Credit Rating Agencies are Not Like Other Gatekeepers” in Yasuyuki Fuchita & Robert E Litan, eds, Financial Gatekeepers: Can They Protect Investors? (Washington, DC: Brookings Institution Press, 2006).

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process at work. Additionally, the report noted a paucity of national-level regulation that would assure the integrity of the rating process.

Consistent with US predilections, the IOSCO CRA Principles were designed to serve as a self-regulatory framework for the industry.

The stated purpose of the IOSCO CRA Principles was to provide “a useful tool for CRAs, regulators, and others seeking to improve how CRAs operated and how credit ratings were used by market participants.”6 Following on from the high-level principles, a series of CRA codes of conduct quickly followed in 2004, 2008 and 2015. The evolution of the CRA codes of conduct track the changing role of IOSCO and demonstrate the factors determining the form and content of international financial standards more generally.

The first IOSCO CRA code of conduct appeared in December 2004. IOSCO members collaborated with two other standard-setting bodies, the Basel Committee on Banking Supervision (BSBS) and the International Association of Insurance Supervisors (IAIS).7 Significantly, the CRAs, in a pre-emptive strike, provided the impetus for the code. By participating in formulating international best practices, the US CRAs deftly deflected domestic regulation that may have been less to their liking. As with other voluntary codes popular at the time (such as voluntary codes of corporate governance), CRAs would adopt internally a version of the IOSCO code and IOSCO would periodically monitor implementation.

The 2004 IOSCO CRA Code was “designed to be relevant to all CRAs irrespective of their size, their business model, and the market in which they operate.”8 Global consensus, harmonization and international best practices

were the watchwords of the day. This “global” approach, however, was hardly international, being narrowly determined by the issues surrounding three large US CRAs in the collapse of two US companies, Enron and World Com.9 A second code appeared in short order, in May 2008,10 again a response to US market events, this time the near collapse of investment bank Bear Stearns a few months earlier.11 Bear Stearns had been swamped by a tsunami of complex derivative products, all of which were credit-rating dependent.12 Domestic concerns about US derivatives markets and the ratings process were again quickly transmitted to the international arena. The 2008 IOSCO CRA Code addressed CRA activities in the “structured finance” and derivatives industry.

Consistent with US disclosure-based regulation, the 2008 IOSCO CRA Code did not prescribe optimal conduct; it simply suggested disclosure about the ratings process and potentially problematic situations. The revisions tracked specific concerns arising out of the Bear Stearns fiasco.13 IOSCO internationalized these domestic US issues and set about propagating them.

Consensus remained key; IOSCO would “seek cross-border regulatory consensus through such means as the IOSCO CRA Code.”14 Early 2009, however, marked a turning point.

The speed and brutality of the global financial crisis, emanating as it did from the United States, shook the foundations of US hegemony in the international markets. US-inspired IOSCO initiatives, designed as predictive and stabilizing measures, had fallen short.

9

Enron was the largest bankruptcy in US history at the time and occurred with startling rapidity. The Sarbanes-Oxley Act of 2002, from which CRAs were virtually exempt, was the legislative response to the fraud and corporate governance failures that resulted in their collapse.

10 IOSCO, Code of Conduct Fundamentals for Credit Rating Agencies (2008).

6 IOSCO, Code of Conduct Fundamentals for Credit Rating Agencies (2015) [IOSCO (2015)] at 1.

7

IOSCO, the BCBS and the IAIS formed “the Joint Forum” to coordinate international financial standard setting for capital markets, banking and insurance.

8 IOSCO, Code of Conduct Fundamentals for Credit Rating Agencies — Consultation Report (2014) at 2 [IOSCO (2014)].

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11 It was not a response to the global financial crisis, which became obvious several months later with the collapse of another US investment bank, Lehman Brothers.

12 Four months after the 2008 IOSCO CRA Code appeared, Lehman Brothers was not so lucky; it was allowed to fail, precipitating a terrifying period of worldwide financial instability.

13 For example, if any one issuer, originator, arranger or other client of the CRA produced 10 percent or more of the CRA’s annual revenue.

14 IOSCO (2014), supra note 8 at 3.

The global financial crisis also triggered a massive regulatory shakeup, both within and without the United States. Regulation began to spew forth. The European Union moved quickly to create a new cross-border regulator, the European Securities and Markets Authority (ESMA) (with direct, and exceptional, regulatory authority over CRAs).15 ESMA, in turn, swiftly acted to regulate CRAs in the European Union. The more robust FSB replaced the ineffectual FSF. A new secretarygeneral, fresh from Brussels, took the helm at IOSCO.16 International responses would no longer automatically subsume US regulatory principles.

IOSCO reports reflected these developments.17 Stated goals of international harmonization and consensus were proving unrealistic. IOSCO acknowledged that “the structure and specific provisions of regulatory programs may differ.”18 By 2010, international convergence of financial regulation was no longer a given.19 In particular, the European Union was flexing its regulatory muscle, engaging in a brand of unilateralism once associated with the United States. This extended to IOSCO. Once dominated by the SEC,20 IOSCO began to demonstrate decidedly European proclivities. For example, in July 2013, IOSCO recommended “the creation of supervisory colleges for certain globally active CRAs….Fitch, Moody’s, and S&P.”21 Supervisory colleges,

15 ESMA was created in 2011.

16 David Wright, a British citizen and former European Commission deputy director-general for all financial services policy within the Internal Market and Services Directorate General, served as IOSCO’s secretary-general from 2012 to 2016.

17 See IOSCO, A Review of Implementation of the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies (2009); IOSCO, Regulatory Implementation of the Statement of Principles Regarding the Activities of Credit Rating Agencies (2011).

composed of groupings of national regulators, were a feature of the European regulatory landscape, providing a mechanism for coordination and cooperation among multiple regulators.22 The need for a college of supervisors for CRAs was symptomatic of underlying regulatory conflicts.

By February 2014, the IOSCO CRA code was again under scrutiny, “to take into account the fact that CRAs are now supervised by regional and national authorities.”23 Self-regulation remained an objective, but IOSCO members had moved on. State-level regulation of CRAs had sprung up in the wake of the global financial crisis; it was displacing international standards. With greater regulation, regulatory conflicts among jurisdictions were inevitable.

In formulating the new provisions of the 2015 IOSCO CRA Code, IOSCO had “surveyed its member jurisdictions on whether the IOSCO CRA Code’s provisions are the same, similar, or in conflict with member jurisdictions’ laws. [IOSCO] also sent a similar survey to 26 CRAs having principal offices in Argentina, Brazil, Canada, Chile, the European Union, Japan, Mexico, or the United States. These CRAs were asked to identify any IOSCO CRA Code provisions that conflicted with the laws in their home jurisdiction.”24 The 2015 IOSCO CRA Code explicitly acknowledges the primacy of state-level regulation, dispensing with the pretense of international consensus and harmonization. In fact, it opens with a surprising disclaimer, indicating considerable dissension within IOSCO: “[A]uthorities… participated in the preparation of this report, but their participation should not be viewed as an expression of a judgment by these authorities regarding their current or future regulatory proposals or of their rulemaking or standards implementation work. This report thus does not reflect a judgment by, or limit the choices of, these authorities with regard to their proposed or final versions of their rules or standards.”25

18 IOSCO (2014), supra note 8 at 3.

19 See Stéphane Rottier & Nicolas Véron, Not All Financial Regulation is Global, Bruegel Policy Brief (2010).

22 The consolidated European exchange Euronext, which operated in Paris, Amsterdam, Brussels and Lisbon, for example, had a college of supervisors, as did its successor, the short-lived NYSE-Euronext.

20 Somewhat justifiably, since IOSCO had its inspiration in the North American Securities Administrators Association, dominated by US regulators.

23 IOSCO (2014), supra note 8 at 4.

21 IOSCO (2014), supra note 8 at 4.

25 Ibid at 1.

24 IOSCO (2015), supra note 6 at 4–5.

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The 2015 IOSCO CRA Code itself resembles a cross between regulation and an operations manual. It introduces detailed provisions on governance, training and risk management.

Existing provisions are “strengthened” (presumably to intensify their normative force) and clarity enhanced. Definitions are added and provisions regrouped or eliminated. European systematizing and regulatory impulses are unmistakable.

Implications The story of IOSCO’s CRA Codes exemplifies wider issues associated with the interaction of state-level regulation with international standards. Dissension within IOSCO is replacing assumptions as to the inevitability of international consensus. The increasing granularity of international standards may also create friction with state-level legislative initiatives. International standards are not created in an abstract or even optimal manner; they are firmly rooted in a particular time and place.

Different participants bring different motivations, to say nothing of unconscious assumptions and biases, to the standard-setting process.

As Roberta Karmel notes, the United States has been both leader and follower in international standard setting, and is much less happy with the results as a follower.26 With renewed EU regulatory activism since 2009 has come greater influence in international standard setting and a corresponding loss of US hegemony. Little wonder, then, that an SEC commissioner would complain about “top-down, forcible imposition of one-size-fits-all regulatory standards on sovereign nations.”27

Yet the IOSCO CRA Codes remain puzzling. There are more than 150 credit rating agencies in the world,28 but S&P, Moody’s and Fitch Ratings together control 95 percent of market share worldwide and 98 percent of the domestic US market.29 How did norms associated with uniquely US market conditions come to express themselves at the international level in the first place?

Regulatory failure at the state level may be one possible explanation. SEC staff had long proposed regulatory oversight of CRAs, but struggled unsuccessfully to imbue these private sector actors with a public purpose. Unlike accountants and auditors, CRAs had neatly ducked regulatory action in the 2002 Sarbanes-Oxley legislation.

SEC staff, through their influence at IOSCO, could raise domestic issues to the international level. Over time, international norms (based on domestic rules proposed but not adopted) could be re-domesticated through pressures to comply with international best practice. The CRAs, for their part, were happy to support international soft law, in lieu of hard SEC rule making.

On the European side, there are no CRAs of note, so the degree of European interest in regulating CRAs, either through legislation or IOSCO standards, is also puzzling. A number of considerations came into play. First, the US CRAs touched raw economic nerves by downgrading European sovereign debt, thus prompting a regulatory backlash. Secondly, ESMA, the new pan-European regulator, replaced the Committee of European Securities Regulators (CESR) in 2011. CESR had possessed only formal advisory powers. ESMA, on the other hand, was a regulatory authority. Hard law could replace soft law. However, Europe already had a large number of state-level regulators, some quite powerful. ESMA was granted only limited direct regulatory authority. Little, if any, regulation respecting CRAs existed at the state level, however, and ESMA could quickly occupy the field with

28 Herwig Langohr & Patricia Langohr, The Rating Agencies and Their Credit Ratings: What They Are, How They Work, and Why They are Relevant (Hoboken, NJ: Wiley, 2010) at 23; the reasons behind the proliferation of small, uninfluential CRAs over the last 15 years are a separate issue.

26 Roberta S Karmel, “IOSCO’s Response to the Financial Crisis” (2012) 37:4 J Corp Law 849.

27 Gallagher, supra note 1.

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29 John B Caouette et al, Managing Credit Risk: The Great Challenge for Global Financial Markets (Hoboken, NJ: Wiley, 2008) at 290; see Partnoy, supra note 5 on the oligopolistic tendencies of US credit rating agencies.

the CRA regulation.30 A regulatory vacuum permitted ESMA to show its muscle, establishing both regulatory credibility within the European Union as well as exerting new-found influence at IOSCO. No member state feathers were ruffled.

And what of the rest of the world, with its 150 or so CRAs, most of only marginal importance?

Surprisingly, IOSCO CRA standards are largely implemented, a testament to the power of peer review and international assessment programs conducted by the World Bank and the IMF.31 Could the degree of implementation of international standards be inversely related to their economic relevance? This would represent a shocking waste of scarce regulatory resources, especially in small jurisdictions that implement standards in order to signal engagement in the international discourse. On the other hand, the process of implementation of international standards may act to promote financial literacy and a common language of finance, irrespective of the relevance of the standards themselves.

As a set of international standards, the IOSCO CRA Codes could be characterized as “pseudointernational,” given their limited practical impact beyond three US private sector companies. And CRAs, despite their pivotal importance in the bond and derivatives markets (to say nothing of their role in the global financial crisis), remain of primary interest to market professionals.

So are there lessons that can be drawn from the experience with the IOSCO CRA Codes, lessons that may be instructive for other sets of international standards with broader impact?

The Organisation for Economic Co-operation and Development (OECD) Principles of Corporate Governance (OECD Principles) come to mind.

A different standard setter, of course, and very different in scope and subject matter. However, the OECD Principles first appeared in 1999, in the heady days of enthusiasm for international financial standards and about the same time as IOSCO assumed its new role as a standard setter. Like the IOSCO Objectives and Principles of Securities Regulation (1998, 2010), the OECD

Principles were picked up by the FSF and became part of the tool kit of the IMF and the World Bank in the Financial Sector Assessment Program (FSAP), thus gaining widespread international recognition and currency. As with IOSCO standards, the OECD Principles produced a complex dynamic between hard and soft law, moving back and forth along a continuum of normativity (practices, contract, listing rules and companies law).32 As with IOSCO, the role of the OECD (and the standards it produced) changed significantly over time. From a select group of academics, practitioners and business people, the participants in the OECD standard-setting process broadened to include various hegemonic national regulators and international institutions such as the World Bank. The standard-setting process became more complex, more compromised and more politically driven. Since the global financial crisis, critics have charged IOSCO with becoming unduly politicized, a handmaiden to the FSB (and thus ultimately to the Group of Twenty [G20]). The agenda set by the standard setter is dictated from above, by political imperatives that may be at a remove from commercial or economic realities. In its third iteration in 2015, this new political dimension to the OECD Principles became unabashedly manifest: the OECD Principles became the G20/ OECD Principles of Corporate Governance.

In their most recent formulations, both the OECD Principles and the IOSCO CRA Codes demonstrate the difficulties now associated with achieving consensus in the international standard-setting process. In the case of the IOSCO CRA Codes, internal dissension is hinted at; the latest IOSCO CRA Code itself is a neat and tidy package, a handy internal corporate governance manual, albeit of seriously limited relevance to most of the world.

The G20/OECD Principles (2015), on the other hand, are a riot of diverse views. The illusion of one-size-fits-all, one set of best international practices, has been shattered by commercial, economic, legal and political realities. This is, perhaps, as it should be. But the G20/OECD Principles no longer point to the future or one vision of it. Major European powers may be simply

30 Raquel Alcubilla & Javier R del Pozo, Credit Rating Agencies on the Watch List: Analysis of European Regulation (Oxford, UK: Oxford University Press, 2012) at 53.

31 IOSCO, Implementation Report: G20/FSB Recommendations Related to Securities Markets (2016) at 17.

32 See Cally Jordan, “The Conundrum of Corporate Governance” (2005) 30 Brook J Intl L 983.

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walking away from them,33 in a manner similar to the recent US resistance to adopting IOSCO standards. The disengagement or distancing of major economies from well-known international standards obviously undermines their credibility.

International standards, as they age, may also be “hardening” and, in the process, perpetuating outdated approaches and concepts. The efficacy of voluntary codes, a key concept in both the IOSCO CRA Codes and OECD-inspired Codes of Corporate Governance, has always been suspect in continental European countries; it is now being questioned in the United Kingdom, its country of origin.

Outdated, irrelevant, erroneous or simplistic concepts imbedded in international standards have found broad currency through the FSAPs conducted by the IMF and the World Bank. Since jurisdictions are “rated” based on their degree of compliance with the various sets of international standards, pressures to conform are strong. In many cases (such as the IOSCO CRA Codes), little harm is done, pointless as the exercise may be. In other cases, however, there can be a nasty economic sting in the scorpion’s tail.34

33 For example, questions of board diversity (especially gender diversity) are glossed over in the G20/OECD Principles (2015). In the same year and following the lead of other European countries, Germany imposed mandatory quotas with respect to male and female board representation, marking a sharp departure from the G20/OECD Principles.

34 Hong Kong has learned this painful lesson with respect to its adoption of an international corporate governance “best practice” known as “one share/one vote.” As recently as 2014, the IMF noted approvingly the presence of a one share/one vote rule in Hong Kong: “Overall, the [Companies Ordinance] remains a high-level framework and thus needs to be complemented in important respects through the Listing Rules (for example, the principle of one share one vote is not imbedded in the [Companies Ordinance] but in the Listing Rules)” (People’s Republic of China-Hong Kong Special Administrative Region, Detailed Assessment of IOSCO Objectives and Principles of Securities Regulation, June 2014 at para 17). In September of the same year, the Hong Kong Stock Exchange lost the biggest initial public offering in history, when mainland Chinese enterprise Alibaba listed on the New York Stock Exchange, citing Hong Kong’s one share/one vote rule as the reason. The Hong Kong Stock Exchange has since changed the rule (April 2018), opting to no longer follow international “best practice.” The irony here is that the one share/ one vote principle originated, but was abandoned, in the United States; Alibaba faced no impediment to listing. Mainland China, which had also adopted international “best practice” with respect to the one share/ one vote rule, has just announced that it will permit “CDRs,” or China Depositary Receipts, to be used by overseas listed companies like Alibaba to circumvent the rule (Henny Sender, “Shanghai-HK exchange competition a boon for China listings”, The Financial Times [17 April 2018]).

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Conclusion The expected convergence and harmonization in capital markets regulation is still a long way off.

International standards have not provided the easy fix once hoped for, nor do they necessarily represent international best practices.

Greater discernment is called for, in setting standards as well as propagating and implementing them. In an ideal world, state-level regulators should carefully analyze proposed international standards to determine their appropriateness to specific market conditions. The large powers already do this, for better or worse. Smaller jurisdictions, though, have little choice. In order to be part of the international discourse, they must show advertence to international standards.

The IMF and the World Bank, for their part, should also show greater discernment in their assessments under the FSAP. Over time, IMF and World Bank FSAP assessments have demonstrated more sophistication and nuance, holding some countries, such as the United States, to a higher standard (and taking it to task for regulatory failings).35 But the regulatory complexity of financial markets can be challenging for the FSAP process and comparability an elusive objective. Also, in the capital markets, the IMF and the World Bank are not themselves standard setters. Existing standards are the tools they reach for (or are handed).

Ultimately, it is IOSCO itself, with all its regulatory resources to draw upon, that should exercise greater discernment in the formulation of international standards. There is still a large space for state-level regulatory action, and with the great variety of markets and regulatory approaches, high-level principles and pressures for convergence may simply be misplaced, as they appear to be in the IOSCO CRA codes of conduct. A more imaginative and discerning approach is called for.

35 See e.g. the 2010 US FSAP assessment against the IOSCO Objectives and Principles.

Author’s Note This policy brief forms part of a larger project, “The End of Internationalism? IOSCO, International Standards and Capital Markets Regulation,” funded

by CIGI. The author would like to acknowledge the able assistance of Saeed Khan and Mike Crampton in the preparation of this policy brief, as well as comments by Hugo Perezcano and a peer reviewer. The usual disclaimers apply.

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