Nick Bayley Head of Regulation London Stock Exchange

Transcription

1 Nick Bayley Head of Regulation London Stock Exchange 1

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9 The regulatory response from the G20 We have today therefore pledged to do whatever is necessary to: restore confidence, growth, and jobs; repair the financial system to restore lending; strengthen financial regulation to rebuild trust; fund and reform our international financial institutions to overcome this crisis and prevent future ones; promote global trade and investment and reject protectionism, to underpin prosperity; and build an inclusive, green, and sustainable recovery. By acting together to fulfil these pledges we will bring the world economy out of recession and prevent a crisis like this from recurring in the future. (G20 London communiqué 2 April 2009) 9

10 Establish a new Financial Stability Board (FSB) with a strengthened mandate, as a successor to the Financial Stability Forum reshape our regulatory systems so that our authorities are able to identify and take account of macroprudential risks; extend regulation and oversight to all systemically important financial institutions, instruments and markets. This will include, for the first time, systemically important hedge funds; endorse and implement the FSF s tough new principles on pay and compensation and to support sustainable compensation schemes and the corporate social responsibility of all firms; take action, once recovery is assured, to improve the quality, quantity, and international consistency of capital in the banking system. In future, regulation must prevent excessive leverage and require buffers of resources to be built up in good times; call on the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards; and to extend regulatory oversight and registration to Credit Rating Agencies to ensure they meet the international code of good practice, particularly to prevent unacceptable conflicts of interest. (Strengthening the Financial System G20 declaration) 10

11 In the end, our financial system only works when there are clear rules and basic safeguards that prevent abuse, that check excess, that ensure that it is more profitable to play by the rules than to game the system. And that s what these reforms are designed to achieve Barack Obama July

12 There are challenges for regulators in many areas Three examples: Regulatory Architecture Capital adequacy Capital markets infrastructure 12

13 Regulatory Architecture A clear goal of post-crisis regulatory changes is to achieve an architecture that offers internationally comprehensive oversight of the financial sector. This will require the creation of new structures, especially at the international level. The challenge for policy makers is how to give international bodies teeth for when the current political will to coordinate has faded. Effective regulation needs to remain close to the market. Balancing international coordination and local circumstances can only be achieved through a principles based approach allowing domestic regulators to meet particular domestic needs. As an example, monetary policy has a clear impact on leverage, and as such, regulation must interact with it. 13

14 Capital adequacy Capital adequacy rules must strike a balance between security and supporting business funding and will continue to be an important issue in The capital and liquidity requirements agreed upon by the G-20 and Basel III will clearly have an impact on banks profit margins with potential implications for the shape of the financial sector and for business funding. Regulators and practitioners should carefully monitor innovation and securitisation processes which may emerge from this loss of profitability. Furthermore, the Basel III capital requirements will not be fully phasedin until 2019 and key parameters to calculate the level of capital banks have not been yet defined, contributing to an increase in uncertainty. 14

15 Capital markets infrastructure Capital markets infrastructure can bring liquidity and transparency to many OTC products, but they are not a panacea. We need to ask deeper questions about the value of these products, regardless of where they are traded. Clearly the crisis raises serious questions about changes to market structure, risk management and securitised instruments. Regulators have responded by implementing a series of measures affecting trading practices, particularly OTC derivatives, high frequency trading and the post trade processes. OTC derivatives on organised platforms brings many benefits, including transparency, price discovery and liquidity, although we need to acknowledge that many OTC products are not suitable for this due to their tailor-made characteristics, to fit specific risk hedging needs. Similarly, the use of central counterparties to clear OTC derivatives trades will also strengthen the safety of these markets and reduce risk although it may concentrate risk into the central counterparties. 15

16 Other key measures Too big to fail : Structural remedies (ring-fencing, Volcker rule ) Resolution mechanisms ( living wills ) Increased oversight of SIFIs Remuneration controls Product intervention Speculation, short-termism and the social value of markets Short selling rules Transaction taxes etc 16

17 Regulatory harmonisation Regulators have learned the importance of international harmonisation. We cannot assume that harmonisation is inevitable The United States has the regulatory initiative Harmonisation must be based on principles 17

18 Regulatory Pressure Index 2010 KPMG International Europe North America Asia Capital Liquidity Systemic Risk Supervision Governance Remuneration Customer Treatment Traded Markets Accounting & Disclosure

19 What is the future for securities regulation? Principles v Rules Self regulation v government regulation National v International 19

20 Principles-based regulation Flexible open to interpretation Allow firms to decide how to comply Almost always supported by detailed rules or guidance Typically involve conversations about the interpretation of the principle Involves regulatory scrutiny of firms systems and controls Usually focussed on outcomes and consequences of actions Tends to be coupled with a more reactive enforcement approach 20

21 Rules-based regulation Inflexible you either comply or you don t - not usually open to interpretation Seen as a box-ticking style of regulation Detailed, lengthy rules invites a legalistic approach to compliance by firms Can be gamed firms can follow the letter of the rule but not the spirit Enforcement approach tends to be more straightforward and direct 21

22 Self regulation A self-regulatory organization (SRO) is an organization that exercises some degree of regulatory authority over an industry or profession. The SRO could be in addition to government regulation or it could fill the vacuum of an absence of government oversight and regulation. The power of an SRO does not typically come from law or government authority. Applies in numerous industries Is well-established but still evolving in securities markets 22

23 Different SRO models in securities markets Four basic regulatory structures, or models, are observed globally. In each model, the public or governmental authority is the primary regulator. 1. Government (Statutory) Model Exchanges are usually responsible for very limited supervision of their markets but are not considered to be SROs. Examples: UK, France and most European Union countries. 2. Limited Exchange SRO Model The regulator relies on Exchanges to perform certain regulatory functions tied to operation of the market (for example, market surveillance and listing). Examples: Italy, Hong Kong, Singapore, USA 3. Strong Exchange SRO Model The regulator relies on Exchanges to perform extensive regulatory functions that extend beyond their market operations, including regulating members business conduct. Examples: Japan (TSE); Malaysia (Bursa Malaysia); US (CME). 4. Independent Member SRO Model The regulator relies extensively on an independent SRO (a member organization that is not a market operator) to perform extensive regulatory functions. Examples: Colombia (AMV), Canada (IIROC), USA (FINRA) 23

24 National v International Securities are traded across international boundaries Market operators are increasingly international businesses Investors and intermediaries are looking for consolidation and cost-saving (35 CSDs in Europe!) Some regulation can be done internationally International standard setting is crucial IOSCO) Regulatory colleges can be effective But International banks are global in life but national in death 24

25 The last words.adair Turner Until the crisis struck, the FSA s approach was based on an overt philosophy that markets are in general self correcting, that market discipline is effective, and that management and boards are better placed than any regulator to identify business system risks, provided processes, structures, and systems are appropriately defined. Therefore we focused on processes, structures and systems. We focused on individual institutions not sector wide or system-wide risks. And we focused on the probity of approved persons not their technical competence. And we tended to focus on conduct of business issues, and not enough on core prudential risks 25

26 . We are now part way through a programme which is changing that, not marginally but radically, moving to a philosophy of "intense supervision" which will entail: Much larger resources devoted to the supervision of high impact firms. A much more intense focus on business strategies and system-wide risks. More focus on technical competence not just probity. More focus on the details of bank accounting. And much greater willingness to reach judgments about the overall risks that firms are running 26