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g20 progress ? September 26, 2009

Posted by Bradley in : financial regulation , comments closed

It’s not entirely clear how meaningful any of this is yet, but there’s much more detail in the G20 leaders’ statement than in the crisis-related statements that came out of earlier meetings. There are some small commitments to the reform of governance of the IMF. And the statement links to the work of the Financial Stability Board, with approval of some of the details, for example with respect to compensation. The FSB published reports yesterday on improving financial regulation, improving stability, and on compensation.

The leaders’ statement claims that progress has been made in improving financial regulation:

Since the onset of the global crisis, we have developed and begun implementing sweeping reforms to tackle the root causes of the crisis and transform the system for global financial regulation. Substantial progress has been made in strengthening prudential oversight, improving risk management, strengthening transparency, promoting market integrity, establishing supervisory colleges, and reinforcing international cooperation. We have enhanced and expanded the scope of regulation and oversight, with tougher regulation of over-the-counter (OTC) derivatives, securitization markets, credit rating agencies, and hedge funds.

But the FSB suggests that it is nervous about some of the domestic developments in these areas. For example, with respect to CRAs the FSB notes:

Attention is needed to avoid requirements coming into place in different jurisdictions that have features that fragment rating markets or impose unnecessary burdens on CRAs.

the sec and regulation of credit rating agencies September 18, 2009

Posted by Bradley in : financial regulation , comments closed

The SEC announced a bunch of new rules on rating agencies (details to be provided later). And the SEC will be seeking views on further de-emphasis of ratings in regulations and on the liability issue. Meanwhile, in the EU, Charlie McCreevy, discussing the reform of financial regulation notes the EU’s actions in this area and claims that the G20 is “broadly on the same line” as the EU on a range of matters, including CRAs. Of course, the EU’s role in regulating CRAs is a bit odd given that the dominant agencies are based in the US. On the other hand, the SEC’s Inspector General’s report on the SEC’s feeble oversight of NRSROs may suggest that a bit of a push from elsewhere, as well as some domestic political attention, is necessary to encourage the SEC not only to focus on developing appropriate rules, but also to apply the rules it does adopt.

sec enforcement as seen by judge rakoff: not a pretty picture September 15, 2009

Posted by Bradley in : financial regulation , comments closed

Judge Rakoff’s decision not to approve the proposed consent judgment in SEC v Bank of America takes the high road:

The proposed Consent Judgment in this case suggests a rather cynical relationship between the parties: the S.E.C. gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the Bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth.

credit rating agencies September 3, 2009

Posted by Bradley in : financial regulation , comments closed

I just posted a paper on credit rating agencies to SSRN. Here is the abstract:

The market for credit ratings is a transnational market dominated by a small number of credit rating agencies (CRAs). The article examines how CRAs have used market protection rhetoric and harmonization rhetoric during the crisis in the financial markets. As criticisms of pre-crisis financial regulation proliferated one might have expected CRAs to be less forceful in their resort to market protection rhetoric. CRAs’ lobbying strategies have evolved as discussions about the broader future of financial regulation have evolved, and they have conceded a greater role for regulation in 2009 than they had before the crisis, but they continue to emphasize, with some success, that as a global business they should not be subjected to different rules in different jurisdictions, and to insist that the core of their methodological approaches to rating should be unregulated.

fsa develops eyebrows? September 1, 2009

Posted by Bradley in : financial regulation , comments closed

It used to be said that the UK financial markets were controlled by the Governor of the Bank of England’s eyebrows. It seems that interviews with the FSA have resulted in 10 per cent of candidates for senior management positions at UK financial institutions withdrawing before hearing whether the FSA would approve of them or not.

protection, not protectionism September 1, 2009

Posted by Bradley in : financial regulation , comments closed

In today’s New York Times, Daniel Price writes about an increase in protectionism, focusing in particular on protectionism in the financial markets. The specific examples he gives seem to be all about EU rules (although there is a reference to “several countries” (not named) having taken steps to “increase domestic lending at the expense of cross-border lending”). Now, in the context of a global crisis where defects in US policy and regulation were significant causal factors I have some sympathy for protective, if not protectionist, impulses.

But I think the EU examples don’t reflect so much European protectionism as a European negotiation with the market. Before the crisis, Commissioner McCreevy was a noted proponent of better regulation. The crisis changed the world, but perhaps not really so much in the context of technical rules of financial regulation. Rather than European clearing of credit default swaps just being a matter of European rules imposed on the markets by protectionist regulators, the new clearing system reflects a negotiation between the Commission and market participants:

In response to the Commission’s call for central clearing of credit default swaps (CDS), ten major dealers committed to clear CDS on European reference entities, and indices based on these entities, through one or more central counterparties (CCPs) established and regulated in the European Union by 31 July 2009. The Commission has set up a working group, involving dealers, the buy-side (e.g. banks, insurance companies and funds), CCPs and supervisors, to monitor the orderly roll-out of this commitment.

Market participants responded to an invitation by the Commissioner. OK, there was a big stick in the background, but the result was not just a matter of protectionism.

The EU’s proposals to regulate credit rating agencies, also referred to in the article, developed over time, and as the result of energetic lobbying about the ratings business being a global business (in fact dominated by three large US raters) and the need for the EU to back off its original position. The requirement for ratings developed by non-EU raters to be endorsed by EU-based entities doesn’t apply to smaller non-EU firms ( a certification system will apply to such firms instead). The details are still being worked out, but the story is at least as much an example of a victory for harmonization rhetoric, as it is an example of protectionism.

fsa on shareholder activism and regulation August 19, 2009

Posted by Bradley in : financial regulation , comments closed

Today the FSA published on its website a “Letter sent out to trade associations” which discusses “how its rules apply to activist shareholders who wish to work together to promote effective corporate governance in companies in which they have invested”. I assume the reference to trade associations in the plural is to the ISC’s members: ABI, AIC, IMA and NAPF. Others who are interested find out via the web site.

making trading suspensions effective August 4, 2009

Posted by Bradley in : financial regulation , comments closed

The UK Government is consulting on the idea of making it easier for the FSA to communicate trading suspensions with respect to the OTC market to market participants by making general announcements (by Regulatory Information Service (RIS)) rather than by issuing individual instructions to prevent specific market participants from trading. However, under the new rules the FSA would retain the ability to direct a trading suspension to groups of market participants or to individual firms rather than issuing a general order. The consultation document suggests this power is likely to be used very rarely, in contrast to suspension of trading on regulated markets, and it doesn’t seem to be sensible to require the FSA to send out individual notices where market participants could reasonably be expected to pay attention to regulatory announcements. The way that the document assumes that suspensions directed to some part only of the market contrasts with how I have always thought about suspensions (and see the SEC on suspensions here). And the draft statutory instrument in the document suggests that individual firms may be able to challenge a suspension with respect to their trading. But this suspension power is, under Mifid, an incident not of the regulation of regulated markets but of the regulation of investment services businesses. Despite all the talk about transnational agreements about financial regulation, comparing financial regulation across borders doesn’t get any easier!

uk financial regulation (building britain’s future) July 8, 2009

Posted by Bradley in : financial regulation , comments closed

As part of the ongoing restructuring of financial regulation, the Chancellor announced new proposals for changing financial regulation (the full document is here (with the Building Britain’s Future logo on the front)). The Chancellor wants:

better informed consumers, who have greater choices, in a more competitive market

In order to help consumers there’s a proposal to consolidate existing FSA resources to provide separate independent consumer education. It’s not clear exactly what this means. But it’s supposed to “empower” consumers. The full document says there is to be a national money guidance service (more of what is being done already, but there is a consultation in an annex to the document which asks for reactions) and that there are to be simple financial products available:

so that there is always an easy-to understand option for consumers who are not looking for potentially complex or
sophisticated products.

Of course this doesn’t guarantee that consumers will choose the simpler products (tellingly, in the consultation section there’s a question asking why some simpler products don’t sell well), or that they will be more suitable to any particular consumer than more complex products. And strikingly to someone based in the US, the section of the report dealing with remedies for consumers states:

The Government believes that the emphasis should remain on ensuring that firms compensate the consumer voluntarily.

There’s a lot more, including proposals for more effective (not better) regulation (in the report there are some references to the idea of better (in the sense of more effective) regulation), and a new proposal for a Council for Financial Stability — which will bring together the Bank of England, the FSA and the Treasury, with some references to governance arrangements (interesting in the light of the IMF’s recently published working paper on financial regulator governance arrangements). The FSA is to be given a new statutory duty to promote sound international regulation and supervision, and there’s a promise to propose to the G20 in the fall arrangements for workouts for large multinational banks.

w(h)ither financial regulation? June 26, 2009

Posted by Bradley in : financial regulation , comments closed

As the Financial Stability Board holds its inaugural meeting, and the IMF invites civil society to comment on IMF governance (here), Vince Cable at the New Statesman has a depressing assessment of what is going on with financial regulation reform in the UK:

It is deeply worrying that some of the most important policy questions for a generation are now being decided by default and in a political vacuum…The response to all these questions is a lazy, uncritical, self-serving one: that, bar a few regulatory tweaks that will need to be made, the previous regime was essentially fine….Yet it is only a matter of months since half of the British banking system collapsed and had to be rescued by the state through total or partial nationalisation.

I’m not sure that things are much better in the US. The administration’s reform proposals are much weedier than they might have been. ISDA is busy warning the FSA to be more careful and slower about introducing changes to regulation. And ISDA suggests that the FSA can learn from the policy discussions in the US:

…further levels of standardization may actually be of debatable value. In this area, the public-policy debate in the US is instructive. A number of end-user organizations have indicated quite clearly that, while they support the objective of greater systemic resilience, they oppose artificial limits on the range of contracts available to them. Their needs are only truly served by the ability of financial services firms to tailor contracts to their specific requirements.

Sounds like business as usual.