Giles Nelson
04-20-2010 01:44 PM
It is my view that one ofthe most significant causes of the global financial crisis was a lack oftransparency in financial markets. Put simply, that means no one, notregulators or market participants, knew what the size of certain derivatives markets(like credit default swaps) was, who held what positions, or what theconsequences of holding positions could be. If financial reform bringsnothing else, it should at least hold banks accountable for the business theyconduct, and that means full disclosure and constant monitoring by responsibleregulators.
This action would help provide the basis forpreventing future crises. No matter how inventive financial products maybecome, if regulators have complete and detailed information about financialmarkets and banks' activities there, better assessments of risk can be made.This means that if necessary, banks' activities can be reigned in throughhigher capital requirements or similar measures. Simply limiting banks'ability to conduct certain business is a blunt instrument that does not resolvethe lack of transparency and likely will hamper economic growth.
Market transparency exhibits itself in many forms. Particularly relevant is that related to electronic trading. Therefore, I predict that regulators will requirebanks to implement relevant stronger pre-trade risk mechanisms. Regulators, such as theFSA & SEC, will ultimately bring in new rules to mitigate against, for example, the riskof algorithms ‘going mad'. This is exemplified by Credit Suisse, which wasfined $150,000 by the NYSE earlier this year for “failing to adequatelysupervise development, deployment and operation of proprietary algorithms.”
Furthermore, volumes traded via high frequencytrading will increase, although at a much slower pace than last year, and atthe same time the emotive debates about high frequency trading creating atwo-tier system and an unfair market will die down.
In addition, with regards to mid market MiFIDmonitoring, greater responsibility for compliance will be extended fromexchanges to the banks themselves. Banks and brokers will soon be mandated toimplement more trade monitoring and surveillance technology. There will also beno leeway on Dark Pools; they just simply have to change and be mandated toshow they have adequate surveillance processes and technology in place. Theywill also have to expose more pricing information to the market and regulators.
This year will see a definite shift to anincreasingly transparent - and therefore improved - working environment withincapital markets. The ongoing development of market surveillance technologiesand changes in attitudes to compliance will drive this forward, creating a moreopen and fairer marketplace for all.
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