The Trade Blog

Remote learning

Moderating two consecutive panel sessions on financial market regulation, as I did last Wednesday morning, is not a schedule I'd recommend wholeheartedly, but it did provide an opportunity to compare the imperfect art of supervision in two very different markets.

The first, starting at 7.30am UK time and effected via videoconference links to Hong Kong and Sydney, tackled various vexatious matters arising from recent changes to Australia's financial market structure and regulatory framework, many of which stemmed from the government's decision to permit trading venue competition several years ago.

The second kicked off at just before 11am in London in front of both video and stills cameras for the purposes of recording and posting clips on www.thetradenews.com. It looked in detail at how compliance officers for UK-based market participants are coping with the simultaneous implementation of multiple post-crisis regulatory changes. These include new capital requirements, electronic trading rules, market abuse laws, an impending shake-up of securities and derivatives trading, clearing and reporting and a new UK regulatory structure, in the form of the Financial Conduct Authority and the Prudential Regulatory Authority.

All of which seems to be leading firms to involve their compliance teams at the start of pretty much every single business decision they make, from taking on a new client to creating a new product to employing a new member of staff. It also led some panellists to question whether all the time, effort and cost involved in designing and complying with new financial markets rules would really achieve the stated aim of policy-makers, i.e. increased investor confidence and reduced systemic risk. When it takes more than two years to begin to charge those who had manipulated LIBOR, despite widespread market rumblings, it's hard to have confidence that future miscreants will be stopped before they harm investors.

Some panellists harked back to simpler times. They recalled a period when visits from an exchange's compliance team could strike fear and lead to immediate suspension of trading privileges, non-professional infringements were kept on traders' files and election to positions of responsibility depended on reputation with peers.

In this increasingly automated era, no one is suggesting we turn back time. The structures and processes that kept everyone in line when buyers and sellers faced each other across the trading floor cannot be expected to work in a technology-driven market.

But while the finance industry's policemen are inevitably more physically remote from their wards, they can make their presence felt in other senses. This might be done through more regular communication, informally and formally, through site visit and the media, in groups or one on one. But perhaps the best route may be through education and professional training. A thorough revamp of the qualifications required to hold certain positions throughout their working life could ensure regular contact with the regulator that imbues the financial market professional with an instinct and an understanding of acceptable practice.

In Australia, one of the many consequences of passing many regulatory powers from the Australian Securities Exchange to the Australian Securities and Investments Commission (ASIC) is the extra costs of market oversight that must be borne by participants. After the government outlined a cost recovery mechanism that takes message traffic into consideration, Australia's treasury took many by surprise by not acceding to a request for market makers to be granted an exemption. The cost recovered from market makers under the government's current plans would exceed by some margin the savings from tighter spreads resulting from their presence in a market structure that supports competition and innovation.

ASIC has been widely praised for its consultative, transparent and deliberate approach to regulation. It has, of course, had the advantage of watching and learning from the mistakes of other markets across the globe as they recast the responsibilities of market infrastructures and participants to allow technology-enabled competitive forces flourish. But it would be unfortunate if the Australian watchdog was undermined by a funding formula that fell unevenly on the regulated.

The highlights of the two roundtables, conducted in association with the Asian Clearing Council and Progress Apama, will be published, respectively, in the Q2 2013 editions of The TRADE Asia and The TRADE.