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Capital Markets Regulatory Compliance: An Olympian Task

With the London Olympics in full swing, one can’t help but think of the state of our industry and the challenges ahead. When it comes to regulation and compliance for the capital markets, we certainly face an Olympian task.

At present, we aren’t exactly in fighting form. The industry has sustained several serious injuries, hampering its ability to perform well in forthcoming events. Despite the many stumbles and falls along the way, we are forging ahead and becoming stronger.

Our referees – the regulators and politicians – are looking on in dismay and are now busy reviewing rulebooks on how the game is played, judged and monitored. Risk is obvious and rushed rule changes could, in effect, alter the sport beyond recognition.

Regulation is brought into place as protection to keep the game and all the players operating safely. But what happens if the regulators force boxers to wear pillow-sized gloves and helmets so big they can’t see clearly? There is risk, too, in over-regulation. However, recent examples in the capital markets world tell a different, more balanced story.

Short selling regulation

Regulating short selling (EU Regulation 236/2012, ESMA 2012/228), which takes effect in November, is essentially an attempt protect us from ourselves by controlling short selling of bank shares and sovereign debt. The intention is to ensure a level playing field across member states and to build a new reporting mechanism.

The regulation text is refreshing reading (honestly!) in that it explicitly states the benefits of short selling and the important role it plays in ensuring the proper functioning of financial markets in the context of market liquidity and sufficient price formation, while emphasizing that identified risks should be taken seriously.

This rushed-through regulation is really about reporting and measuring. This is similar to the introduction of electronic censoring of goals and ball positions in sporting events. Was the tennis ball short of the base line or not? Now we will know the answer.

Of course this also presents challenges for market participants such as increased burden of already stretched back office systems and staff, the need for flexible data systems, new reporting obligations, etc.

With the short selling regulation, the European Securities and Markets Authority is looking for a level playing field and a uniform implementation and enforcement across the union. It is also empowered by the commission to step in and enforce preventative measures across all member states.

Investor protection

The final report for ESMA Guideline 2012/387 was published on July 6 and we're now waiting for the clock to start ticking for the guidelines to take effect, approximately four months after the publication of the translated versions.

The guidelines detail to great extent how investment firms should record and monitor sales practices and customer vetting practices, including regular follow-ups, to ensure recommendation of proposed financial products are fit for their purpose, are clearly understood, and match the risk profile of the customer.

They do not make any difference between professional and single individual customers, so the systems the guidelines are asking for are relevant for investment firms focused on professional investors as well as firms focused on retail.

Again, new rules bring new challenges. To comply, firms will need to have systems in place for efficient and easy recording and follow-up. And yet many firms are not yet gold-medal material in this regard.

MiFID and MAD marathon

We mustn’t forget our ongoing regulatory marathon in the background. Between MiFID and MAD, it’s a difficult marathon through London streets, trying to avoid pot holes. Of course, firms are still running while waiting for Commission voting, which has been postponed to mid-September.

Will the industry light its torch and bear its head high, work with politicians and regulators, resist over-regulation and arrive at a state that ensures fair, open markets that will lead to a thriving and healthy industry?

There is still judging to be done, but it certainly seems we are running, cycling, and swimming in the right direction.


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