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Iosco task force highlights private equity risk to international markets

The International Organisation of Securities Commissions has published the report of its technical committee’s task force on private equity, which was mandated to conduct a preliminary rev

The International Organisation of Securities Commissions has published the report of its technical committee’s task force on private equity, which was mandated to conduct a preliminary review of private equity markets to identify any issues that could be addressed through future Iosco work.

In addition to identifying specific potential risks posed to the financial markets by private equity, the task force has pinpointed two pieces of work to be undertaken in future technical committee work programmes, a survey of the complexity and leverage of capital structures used in leveraged buyout transactions, and an analysis of conflicts of interest arising in the course of private equity business and the controls used in relevant Iosco jurisdictions.

‘The growth of private equity in recent years poses a number of challenges for regulators charged with the oversight of international capital markets,’ says Michel Prada, chairman of France’s financial regulator, the Autorité des Marchés Financiers, and current chairman of Iosco’s technical committee.

‘This report has identified a number of areas where private equity may pose potential risks to financial markets. However, many of these issues have already been the subject of regulatory examination, and to avoid duplication the technical committee will focus on two specific areas in its future work.

‘We will recommend that the Joint Forum analyses the complexity and leverage of buyout vehicles, and Iosco will analyse the conflicts of interest that arise during private equity transactions and how these are addressed. Iosco will seek to engage the industry and investors in this work.’

The planned survey of the complexity and leverage of capital structures employed in leveraged buyout transactions by the Joint Forum aims to facilitate an assessment of the potential impact that the default of large private equity portfolio companies could have on the efficient operation of related public debt securities markets and any systemic issues that might arise as a result.

Iosco’s analysis of conflicts of interest that arise during the course of private equity business and the controls used in Iosco member states to provide appropriate levels of investor protection will focus in particular on public-to-private transactions and the listing (or subsequent re-listing) of private equity portfolio companies.

Iosco is the world’s leading forum for international co-operation between securities regulatory agencies, and the organisation’s membership regulates more than 100 jurisdictions and 90 per cent of the world’s securities markets.

The technical committee, a specialised working group established by Iosco’s executive committee, is made up of 15 agencies that regulate some of the world’s larger, more developed and internationalised markets, and seeks to review major regulatory issues related to international securities and futures transactions and to co-ordinate practical responses to these concerns

The Joint Forum is a co-operative cross-sector work forum whose parent bodies are Iosco, the Basle Committee on Banking Supervision and the International Association of Insurance Supervisors, and whose mandates and reports are approved by its three parent bodies.

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