Let's talk about global financial meltdowns and economic disaster. We have some fresh thinking on that subject. 

Last week the International Organization of Securities Commissions published its annual survey of securities markets risks, which takes a look at what's on the mind of securities regulators around the world. In theory, IOSCO members (the Securities and Exchange Commission among them) can use this survey to coordinate their regulation of the financial markets. We participants in the financial markets, meanwhile, can use the report to get a sense of where financial risk might be lurking these days, and of which weaknesses in the capital markets regulators might want to tackle next.

The bottom line: regulators of the financial markets have one view of which risks are important ones these days, while participants in those markets have quite another. IOSCO polls a wide range of market participants in its survey, from regulators to stock exchanges, bankers to academics, hedge fund players and more. When you compare the top five emerging risks cited by market participants and market regulators, you get this:

Market Participants

Market Regulators

Recovery & resolution plans

Financial risk disclosure

Search for yield

Retail financial products

Fragmentation

Illegal conduct

Regulatory uncertainty

Capital flows

Centralized counterparties

Benchmarks

In other words, securities regulators are worried about misconduct, poor governance, and ill-conceived financial engineering that might usher in another financial crisis. Wall Street participants, meanwhile, are still worried about the consequences of all the securities regulation we've unleashed in the last few years: clearinghouses for derivatives trading, disagreement among regulators globally on how to manage systemic financial risks, compliance as a Systemically Important Financial Institutuion—all in the context of a world with zero percent interest rates as far as the eye can see.

You can't blame either group for the worries they have. Citigroup, for example, just flunked its latest stress-test thanks to weak controls and an inability to project revenue and loss scenarios properly. That failure ruined its plans for dividends and share repurchases, and has driven Citi's senior executives to obsess over how to remedy the problem. You can't blame CEO Michael Corbat for behaving that way, since his compensation, his job, and his shareholders all depend on him solving it.

On the other hand, if you're the SEC, you probably spent a fair part of 2012 aghast at JP Morgan and its now-infamous London Whale trade—a concoction of financial engineering, misconduct, and poor risk management that led to a $6 billion trading loss in one quarter, which no senior executives at JP Morgan saw coming. Other regulators spent years fixing the shameful mortgage industry practices that helped cause the financial crisis, and still more are staring at gushers of capital sloshing around emerging markets, carrying fraud, money-laundering, bribery along with them. You can't blame regulators for worrying about all that either.

In fact, when you think about those two lists, that difference between the two groups may not even be a bad thing; each one is more worried about the unintended consequences of what the other is doing. That's a good thing, since regulators and the financial industry alike have a long and impressive record of not fully grasping how their decisions will affect other people.

So what should compliance and risk officers take away from all this?

Remember why Congress passed the Dodd-Frank Act in the first place. At its most fundamental—after you discount all the political posturing so lawmakers could look like they were taking action—the Dodd-Frank Act was intended to improve the stability of the financial system. That's all. Sure, it had red herrings about CEO pay and conflict minerals and say-on-pay votes; and lawmakers never did resolve what to do about Fannie Mae and Freddie Mac, two prime culprits behind the mortgage crisis. Still, when you boil the law down to its ultimate objective, stability of the financial system was it.

Think about financial risks out there through that lens, and some do stand out more than others as needing attention. Financial risk disclosure is still a big concern, as JP Morgan demonstrated. Structured investment vehicles, special-purpose entities, and the like all figured greatly in the 2008 financial crisis and the corporate accounting scandals of 2001-02 before that. Even now the Financial Accounting Standards Board is still stamping out the various tricks companies might use to hide financial risks.

IOSCO mentions a few other suspects. Centralized counterparties (“CCPs” in industry parlance, such as the clearinghouse for derivatives trading) are a new creature in the capital markets, and IOSCO speculates that as companies place more trading risks with CCPs, the CCPs themselves might become too big to fail—creating the very systemic risk they were intended to prevent, which sometimes happens with financial regulation.

Capital flows are another rising swiftly as a risk on regulators' minds, as money flies anywhere in the world that might offer a better return than what you get here. On this one I tend to fault corporations, ceaselessly searching for higher yield. The result can often be a stampede into emerging markets (which keeps anti-corruption programs mighty busy), and then a stampede out of them. That leaves instability all over the place, including geo-political strife that can spill far outside the financial and regulatory worlds.

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