Skip to Content

Truth and Unintended Consequences

So much for “praise in public and reprimand in private.” A teacher publicly reprimanding a student who launches a spitball in class demonstrates to everyone the consequences of certain behavior.


Regulators’ handling of the 2008 financial crisis and this year’s scandals among UBS, MF Global and others had to be as public as they were demonstrative. But creating new regulation by committee while financial technology and instruments evolve will require clairvoyance by drafting authorities — and commitment to compliance by capital markets firms won’t hurt.


When the teacher reprimands publicly, everyone learns.“My view of regulation, self-regulation and/or laws in general is that they are created as disincentives to do harm, not a firewall to stop bad things from happening,” Larry Tabb wrote this week on TABB Groupin response to the MF Global scandal. “I’m not sure there was much more the CME could do.”


CME Group is MF Global’s oversight regulator, but it isn’t a pushover, as Tabb noted and as I pointed out earlier this month. That means the kind of regulatory reform Tabb and others want is only possible if new regulations have sharper teeth.


But it is difficult for authorities to foresee every way those teeth will cut. The G20’s Financial Stability Board designated 29 banks last month as Systemically Important Financial Institutions, or G-Sifis, requiring higher capital reserves as a deterrent to growing “too big to fail.”


“Though most of the big banks fought against the G20 initiative, they are now expecting to benefit from the designation,” Rob Cox and Peter Thal Larsen wrote on financial commentary site Reuters Breakingviews. “In the eyes of credit rating agencies and customers, banks with a G-Sifi label will be deemed stronger counterparties … this competitive edge could outweigh the cost of holding more capital.”


So the G-Sifi label may cut the wrong way.


“What I’m hearing from people at smaller Wall Street firms, Sifi is already becoming a code word for ‘ultra-safe counterparty’ against whom minimal collateral requirements may be charged,” said CNBC’s John Carney. “It will also lead to more consolidation; banks that already receive the most stringent capital treatment face little disincentive to further expansion.”


With regulation often delayed or ineffectual, technology can help firms seeking to get their own house in order. Popular for extracting valuable information from Big Data in real time, Complex Event Processing (CEP) could employ its algorithmic trading technology on messaging systems and trade databases to uncover unauthorized trading before it reaches the scale of September’s UBS scandal.


“CEP is going from niche to mainstream,” Sybase’s Stuart Grant said in this month’s print edition of Operational Risk & Regulation, adding that CEP naturally fell into areas such as trading algorithms and market data analytics. “Now it has expanded into other areas of firms’ businesses, such as real-time or near-to-real-time risk management and position-keeping.”


In sum, the teacher must punish the student for the spitball, but the other students must learn from it — and ensure their left hand knows when their right hand is up to no good.

You must be Logged on to comment or reply to a post.