Writing this, I come fresh from yesterday’s SIBOS panel on the merits of central authority intervention in the capital markets. The timeliness of the topic made the discussion a livelyone, especially with today’s securities industry experiencing heightened
scrutiny as a result of the credit crunch. For me, the burning issue around regulation is how far-reaching it should be. I believe the correct answer to that question is that it should go far enough to protect investors and correct any misalignments in the
industry but it mustn’t inhibit a firm’s ability to participate in the global marketplace. A light touch, proactive approach to intervention can be successful without the threat of being overly dictatorial.
This is well exemplified by the Fed’s approach to credit derivatives processing. Had the Fed intervened too strongly it would have cramped the growth of the OTC derivatives market. Instead, market participants have been able to work towards a specific goal
without the prescription of how to get there.
Having said all of this, the sudden collapse of Bear Stearns, the sub-prime mortgage crisis and the SocGen situation have all seriously shaken investor confidence in the global financial community. The question we have to ask here is, would proactive central
authority intervention have averted any or all of these crises? It is impossible to provide a definitive answer to this question, but we can say with some certainty that forcing regulators to react to a crisis cannot be a healthy scenario. A crisis by its
very nature, requires an immediate solution; the corollary of this is that at times, regulators must go it alone to define the rules, rather than solicit the involvement of the industry to develop a solution.
However, the different sections of the global financial community can be instrumental in better positioning the industry against financial shockwaves, thereby reducing the need for overzealous intervention. For example, operations has a significant role
in assuaging some of the investor concerns that the credit crunch has precipitated. Take the OTC derivatives markets once again. Today, more than two trillion dollars of cash and securities are being used to counter the operational and market risk. A key
part of reducing operational risk will be to improve efficiency by automating reconciliation and collateral management processes for the entire duration of these long-term contracts thereby reducing the unknown factors inherent in derivatives contracts.
To conclude, I guess what I’m really saying on the merits of central authority intervention, is that the most effective way of devising rules for the capital markets is for the industry to work in partnership with the regulators to establish a robust framework.