Those that are praying Jacques de Larosiere and his team will produce a panacea to address all the shortcomings of Europe’s financial infrastructure today are likely to be disappointed. My sources tell me that while it will make useful recommendations on
approach it certainly will not satisfy the political desire for dramatic action.
That said, recommendations on approach will be helpful. Right now, governments seem to be prevaricating between
more Europe which implies the creation of European super regulators or
less Europe whereby national power prevails and governments continue to handle their financial crises in their own way.
Recent events would suggest that the route currently being sought is an uncomfortable hybrid of the two. As we saw this weekend, governments are keen to be seen as coming together in a coordinated effort but in reality the EU’s lack of legal basis prevents
new institutions being set up or more power being handed to groups such as the ECB and CESR. Ultimately this is because member states want to remain in control of each of their jurisdictions.
My biggest fear is that disappointment at the de Larosiere process could result in over zealous, knee-jerk regulation, the corollary of which could be Europe losing its competitive edge in financial markets, much like SOX did in the US.
It’s important that policymakers and market participants keep their heads in the eye of the storm and stick to the objectives that everyone agrees upon: the creation of a less opaque market with stronger infrastructures and better processes. And if policymakers
and regulators want to make their goals achievable, they should focus on current practical solutions that already exist.
Same Day Affirmation (SDA) of trades is a great example of this. Simply put, it’s the automation of trade processing in the front, middle and back office. SDA can mitigate operational risk by providing more clarity when default occurs and can reduce systemic
risk by providing more visibility about who owns what and what overall liabilities exist.
The current obsession with clearing is absolutely right, but there is little point improving processes at the end of the pipeline if all activity prior to that has been inefficient. Also, it shouldn’t be forgotten that effective clearing doesn’t protect
the buy-side because they do not directly participate in CCP.
SDA is a universal principle. It’s good for all components of the market community and can be achieved within the existing market infrastructures. Its effective implementation probably requires some form of regulation or at least the threat of it. If
policymakers are looking for quick, but sensible wins that will improve the stability of market infrastructure, mandating SDA across Europe would certainly fit the bill.