Virtual Remarks by Jean Paul Servais

Ladies and gentlemen, good morning. It's a real privilege to join you here remotely during the well-known Abu Dhabi finance week. Let me begin by highlighting that the financial system is evolving rapidly shaped by of course innovation, new sources of capital and shifting patterns of intermediation. Non-bank financial intermination or in other words marketbased financing has become as you know ladies and gentlemen a critical pillar of global finance and a key component of economic growth. And this evolution brings of course opportunities for diversification and for enabling economic dynamism.

But it also brings new challenges for regulators. How do we maintain market integrity, investor protection, financial stability while allowing innovation to flourish? And this is exactly the key question that the international organization of securities commission its members and other global bodies will need to tackle. Let me therefore start with some context. As you know, private finance has grown to play a vital role in the global economy.

It offers long-term financing solution, support entrepreneurial activity and provides investor with diversification and yield opportunities. and private credit in particular has emerged as one of the fastest growing segment of the financial system. Today the market is estimated at around $2 trillion US having a spending piece over the past decade. Private credit funds have stepped in where banks have pulled back financing sector critical to economic resilience and growth. And this growth is of course welcome but it also raises important question and as private credit becomes more int connected with the wider financial system its systemic relevance increase and that's why global regulator including IOS scorecope are paying close attention.

So what's theoscope perspective and work about this? I think it's not exaggerated to stress that IOS has been proactive in this space. In September 2023, we published a report on emerging risk in private finance which highlighted key variabilities, hidden leverage and liquidity mismatches particularly in funds offering redemption option despite holding illquid asset. Opacity in valuation and structure making risk assessment challenging. Retailization trends as retail investor gain exposure to complex product.

Interconnectness with banks and insure creating potential transmission channels in times and stress and the need for effective data for risk monitoring. All of these remain highly relevant today and Arosco has since deepened his work in this area by working closely with the FSB the financial stability board that's advancing initiative on NBFI data and recently completed its recommendation on NBFI leverage on NBFI leverage crucially the recommendation address the need for authorities to establish domestic frameworks to effectively identify and monitor this leverage risk. They also explicitly target contracted credit risk management as a so-called recommendation. Number seven, urging authorities to review the adequacy of existing private disclosure practices between leverage non-banks and their bank leverage provider. And this will be an important but a very delicate things to balance with respect to valuation.

Allow me to say that IOS code just recently published its consultation report on valuing collective investment schemes which seeks to tackle some of the challenges presented by the inventority in private market valuation methodologies. There was a strong case for updating existing IOS principle since the market has evolved with an increase in collective investment fund holding less liquid and illquid assets including private assets as well as increased retail investment in such schemes. Further, as the market pushes toward retailization, a key area of supervisory focus will of course be the alignment between a funds obligation and the liquidity of its assets and whether retail investor understand the risk of their investment. And this is an area IOS will continue to look at in 2026. How to look ahead?

because we know that there is still a lot more to do. Well, understanding the interconicness in this market will also be fundamental and the key nexus that connects the private market to the regulated system are the large bank brokers dealers. These bank are not made by standards. They are the central providers of financing and liquidity to private funds. Furthermore, these banks are key information holders.

They process vital data on funding utilization drawn down patterns and borrowers overlaps that we as regulator could better utilize to complete the picture of system risk. The sophisticated links between large banks and private funds means that shock originating in the private segment could rapidly reverberate across the traditional banking system. And finally, of course, I want to touch on data. Over the course of our work, it has also become increasingly obvious that Rob's data is essential for effective oversight. The evolving significance of private market necessitates a corresponding evolution of regulatory's understanding of the risk in this market and we need to move beyond reliance on aggregate statistic which by their nature can obscure the structural risk and concentration that define the markets.

We indeed need detailed data to understand where the main risk come from and how different players are connected. Specifically, we need to answer two question. First, where exactly is the leverage and how big is it? This include leverage inside the funds at the level of the company it owns or through special financing tools. Second question, how are exposure spread across sectors and countries and how do they flow from one to another?

This is also key to understanding how problems in private market might spill over into the regulated banking system or other parts of the world. And without this level of detail, we can't fully understand the real network of exposure. And our challenge is therefore to strike the right balance ensuring we have the tools and information to safeguard stability while preserving the flexibility and innovation that private market bring. It's about smart proportionate oversight that support grow while sistinately protecting investor and the financial system and I encourage all to engage openly in this discussion. We have a lot to learn from each other and the better we understand this market better we are able to respond in the right way.

Thank you for your attention.