Is real time regulatory reporting a goal too farfetched? Aside of the theoretical premise that the earlier you know, the earlier you can prevent, is there a solid practical base to the argument. Would the function of the regulator be better served not by
such focus on transaction level detail but by principles based governance?
Below, I discuss the advantages / disadvantages of both the approaches.
Let me spend some time first on Transaction Based regulation running on a real or close to real time basis.
- Access and mechanism to get and store intelligently all forms of data from the market such as entity details, transaction details, corporate action details and other relevant data.
- Access to intelligent personnel from a functional as well as technological perspective who can sift through large volumes of data and make intelligent observations in quick time.
- Full detail of all transactions early on close to the trade will allow regulators to potentially run even intelligent algos to catch up quickly to any possible scams / scamsters.
- It will also allow them to draw patterns of trading (circular, for instance) to establish within minutes any market tampering.
- Receiving full data is one thing. This is fully possible. Making intelligent use of the same is quite another. The question to ask is ‘Are regulators equipped to develop intelligent algos to second guess the traders? Even if they have the technology, do
they have the means – the very people – who will sacrifice fat bonuses at IBs or Traders to work for regulators?
- Secondly, without intelligent means to make use of available data, would the multitude of reports be just a catch all mechanism with large loopholes when it comes to actual governance. After all, if you have to vet everything, you would end up glazing at
all of it.
Now for the principles based regulation.
- Cleanly written principles that deliberate not only on the principle itself but also the rationale for the same and the objectives of the regulation make it difficult for errant personas to interpret principles to their own advantage.
- A strong legal system that weighs in on the spirit with which regulations are followed rather than the letter.
- A guaranteed access to all forms of data should the need arise for investigation.
- Although in a court of law, you are innocent until proven guilty, the regulatory function cannot function on this premise. Its very nature has to be to suspect everyone. Principles based regulation often gets stuck in interpretations. Batteries of lawyers
/ accountants can argue the same principle in multiple ways depending on benefits arising. You need rules to herd people.
- If principles based regulation is not backed up by recourse to availability of full and ready data for subsequent investigation, then there is little the regulator can do to prove any malafide intention in a court of law.
- Principles based governance depends heavily upon a very strong and smooth legal system that weighs in on the spirit with which regulations are followed rather than the letter.
- Clearly written principles that deliberate not only on the principle itself but also the rationale for the regulation and the objectives of the regulation make it difficult for errant market participants to interpret principles to their own advantage. Of
course, principles based regulation depend heavily on a strong legal system as envisaged above.
- While the necessity for availability of full data is a given as discussed above, principles based governance allows regulators to look at the macro impact of the regulation. Not having to process multitude reports in real time allows them time to focus
on key aspects of the market rather than trying to boil the ocean.
- By having principles that need to be followed in spirit rather than in letter, market participants are vested with an obligation to adhere to the principles. So if any act is not done in good faith or with a view to avoid / evade regulatory compliance,
such market participants can be brought to book.
While both forms of regulation have their advantages and disadvantages, principles based governance allows regulators to pursue even those cases where market participants have followed the law in letter but not in spirit.