Value, Financial. Unholy Trinity? Innovation and Regulation - an. Jeremy Josse. March 2015

Transcription

1 Value, Financial Innovation and Regulation - an Unholy Trinity? Jeremy Josse March 2015

2 The views expressed in the following material are the author s and do not necessarily represent the views of the Global Association of Risk Professionals (GARP), its Membership or its Management. 2

3 VALUE

4 Could there really be value in a contract / option to buy a Megalodon? Brokers generation of demand Control of supply Liquidity Arbitrage Habit

5 Gold Diamonds The $ bill Contracts for Differences Internet / social media stocks

6 Market value v intrinsic value Technical analysis v fundamental analysis The efficient market hypothesis Behavioral finance Shleifer, Shiller Quantifying irrationality

7 Mispricing CDOs/CLOs CDS Complexity / lack of transparency The nature of financial innovation

8 FINANCIAL INNOVATION

9 Rights Contractual strings / permutations Epicycles upon epicycles Legal fictions

10 Loans Stocks Convertibles Derivatives Securitizations CDS

11 Empirical testing cf. a drug or a car Deductive inference cf. mathematics No social laboratory Macro-economic policy v private financial innovation Financial innovation is Critical, but Vulnerable

12 New innovation CDOs/CLOs and CDS Untested hence mispricing One of the causes of the crisis The nature of financial innovation itself

13 REGULATION

14 1970s Emergence of a new asset class Irregular patterns of behavior Wild price movements Now an established art form

15 Dysfunctional patterns of behavior Value fluctuations greed Distributive justice Bubbles Financial innovation

16 The rule of law to the rule of lawyers 100 years of regulation Micro-managing rules Dodd Frank Living wills Regulatory failure

17 1931: Uniform Sale of Securities Act 1932: Reconstruction Finance Corporation Act 1933: Securities Act of : NYSE Requires Audited Financial Statements 1933: Glass-Steagall Act 1940: Investment Company Act and Investment Advisers Act 1940: NYSE Multiple Trading Rule 1942: Rule 10b-5 Adopted 1944: Delaware Limitations on Shareholder Actions 1951: Arizona Securities Act 1951: Loss on Securities Regulation 1953: Private Offering Exemption 1953: First GAAP Codification 1954: Proxy Rule Amendments 1956: Uniform Securities Act 1963: Investment Tax Credit Accounting 1964: Securities Act Amendments 1964: Come to Rest Abroad Offerings 1968: Williams Act 1970: Securities Investor Protection Act 1973: International Accounting Standards Committee Formed 1974: Commodity Futures Trading Commission 1974: Safe Harbor Rules 1981: Central Registration Depository 1982: Regulation D 1982: Futures Trading Act 1982: Garn-St. Germain Depository Institutions Act 1982: Shelf Registration 1984: Insider Trading Sanctions Act 1990: Market Reform Act 1990: Regulation S 1990: Safe Harbor for Resales 1990: Securities Enforcement and Penny Stock Reform Act 1992: Proxy Changes 1993: Investor Protection Trust 2000: Regulation FD 2000: Commodity Futures Modernization Act 2001: FASB Ends Pooling-of-Interests Accounting 2002: Sarbanes-Oxley Act 2010: Dodd-Frank Act 2010: Consumer Financial Protection Bureau 2010: Financial Stability Oversight Council 2012: JOBS Act Regulatory Exemption Some major Back Office Nasdaq and Y2K, Boiler WorldCom Flash Crash events Crisis, Auditors CBOE open Room Scams. Fraud, Enron Under Siege Scandal, Madoff Scandal, Great recession 2010 Present 1934: Securities Exchange Act of : SEC Accounting Series Release 1933: Maloney Act 1939: Trust Indenture Act 1939: NASD Created 1945: SEC Limits Application of Accounting Standard for Taxes 1946: Administrative Procedure Act 1946: NASD Registration of Broker Representatives 1947: Hoover Commission Report 1957: NYSE Rule : Pooling-of-Interests Accounting Sanctioned 1958: Deferred Taxes Ruling 1968: Management's 1974: ERISA 1985: Revised Uniform Discussion and Analysis 1975: Fixed Commissions Securities Act Eliminated 1975: Securities Act Amendments 1975: Municipal Securities Rulemaking Board 1975: Voluntary Disclosure Program 1985: Poison Pill 1986: Tax Reform Act 1987: NASAA Model Uniform Rules 1988: Rule 19c : State Exemption for Nasdaq Trading 1989: Rule 15c : Materiality Defined, Regulates Municipal Sunshine Act Underwriters 1977: Foreign Corrupt 1989: FIRREA Practices Act 1977: FASB Voting 1978: Rule G : Specialized Industry Accounting 1994: Uniform Voting Standard 1995: Creation of SEC Office of Municipal Finance 1995: Private Securities Litigation Reform Act 1996: National Securities Market Improvement Act 1996: Rule G : Nasdaq and NASD Regulation 1997: Independence Standards Board 1998: Plain English Rules 1998: Regulation ATS 1999: Gramm-Leach- Bliley Act 2002:New Uniform Securities Act 2002: Public Company Accounting Oversight Board 2003: NYSE Corporate Governance Standards 2004: Net Capitalization Rule Exemption 2005: Reform of Offering Process 2005: Regulation NMS 2005: Ban on Municipal Securities Dealer Use of Consultants 2006: Credit Rating Agency Reform Act 2006: 529 Plans 2006: Fair Value Measurements 2006: FINRA 2009: Credit Card Company Restrictions 2009: FASB GAAP Codification 2012: STOCK Act 2013: Volcker Rule 2013: Dark Pools Disclosure.and the story continues

18 Principles Clarification of rules solely by judges UK Takeover Code Vexatious litigation Form filling

19 CONCLUSIONS

20 Value $ Financial Innovation Regulation