Securities regulators must facilitate industry innovation, rather than clinging to the status quo, or allowing market novelties to go unchecked, argues the Ontario Securities Commission (OSC) in a paper published on Thursday.
A Framework for Responsive Market Regulation examines the commission’s approach to regulatory policy, and details how this has played out as Canadian market structure evolves.
The paper, which was presented at an Oxford University conference last month, reviews how regulators dealt with the reshaping of the equity trading landscape in Canada, the development of rules to allow alternative trading systems (ATSs) to emerge, the introduction of dark pools, concerns about high-frequency traders (HFTs), the adoption of speed bumps, and the evolution of the order protection regime.
“The challenge for a regulator to keep up with, much less anticipate, changes in market structure and practice is intense. However, doing just that is key to the regulator’s purpose,” the paper says.
“Failing to look forward leaves regulators with two unappealing choices. The first would be to preserve the regulatory status quo and ban any new practice or entity that does not fit neatly into the existing framework. The second would be to decide that regulating new entrants is too difficult, which would allow an unregulated sector to operate, flourish and perhaps begin to supplant the existing markets,” the paper adds.
The paper — which was co-authored by Timothy Baikie, OSC senior legal counsel; Tracey Stern, manager, market regulation; and Maureen Jensen, OSC chairwoman and CEO — argues that, “a regulator’s raison d’être is not simply to respond to market issues but to understand the changes and business decisions in the market and to have the courage to foster a responsive regulatory climate that allows innovation to occur while ensuring that core principles, such as investor protection, are preserved and that the impact of any change is monitored.”
Regulators should have a vision of an ideal market, the paper says, while also being aware of the possible impact of developments that may be beneficial at a certain level, but could become counter-productive if left unchecked.
“Regulators can’t be afraid of change, and should allow innovation unless there is clear evidence that it will have a negative impact on market integrity and market quality. In doing so, innovative practices need to be monitored to ensure there is not a negative impact, and the regulator must react quickly if there is,” it says.
At the same time, regulators should also be prepared to re-examine previous decisions and address any gaps, or unintended consequences, that may emerge. “In other words, regulation must always be dynamic and forward-thinking, but also retrospective,” the paper says.
“As our capital markets evolve, we must have the courage to foster a responsive regulatory climate that allows innovation while ensuring essential investor protections,” says Jensen, in a statement.
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