Financial Regulatory Forum

SEC faces challenges before fast-trading reforms can go on the books

By Emmanuel Olaoye, Compliance Complete

The Securities and Exchange Commission has rolled out its intentions to regulate high-frequency trading, making stricter regulation in some form a strong possibility, but the agency faces more work and some challenging obstacles before it can put new rules in the books.

SEC Chair Mary Jo White in a speech last week outlined her goals for regulating high-frequency trading (HFT), at a time when political interest over the fairness and risks of the practice has surged in the wake of a best-selling book by financial writer Michael Lewis.

White‘s intentions for regulating high-frequency trading, which has taken a dominant role in U.S. equity markets, include registration requirements for proprietary fast-traders. Under such rules, firms registering as broker dealers would have to meet net capital requirements and establish adequate risk management controls.

The agency is also working on a rule to restrict disruptive trading rule. The rule would apply to proprietary traders in “short time periods when liquidity is most vulnerable and the risk of price disruption caused by aggressive short-term trading strategies is highest.”

The initiatives sound good on the surface but the SEC needs to work out the details, said Bernard Donefer, a professor of information systems in financial markets at Baruch College in New York. This includes learning more about the trading strategies of HFT firms before forcing them to register.

Mitigating “Margin Call” risks

By Dave Ingram and Max Rudolph
The opinions expressed are their own.

The financial thriller, “Margin Call,” which opened in movie theaters on Friday, tells the story of a firm in the mold of a Bear Stearns or Lehman Brothers at the height of the financial crisis. The firm in the film is akin to real-life firms that seemingly discover too late their reliance on a culture built on growth at any cost and tainted models at the expense of risk management.

Movies are great teachers, helping everyone better understand complex situations that can be confusing even to experts. “Margin Call” does just this, by putting a spotlight on the crucial role that proactive and skeptical risk management (or lack thereof) plays, particularly in financial services. Although the Occupy Wall Street movement is still in its infancy, it demonstrates how ordinary people feel the impact of the financial industry’s actions – and mistakes. Likewise, the movie demonstrates how great an impact one firm’s actions can have on the entire financial industry, underscoring the importance of risk management in such an interconnected system.

Based on our experience as actuaries, focusing on identifying and mitigating risks, we’ve outlined what we believe are the most important lessons of both the film and financial crisis. Hopefully those who see this movie, and those who lived through the crisis, will heed them.

Taiwan takes tough stance on corporate governance

By Patricia Lee

(Complinet) Taiwan’s Financial Supervisory Commission has stepped up enforcement of its corporate governance regulations by making it mandatory for listed firms and financial institutions to appoint independent directors and set up a remuneration committee. The latest regulations will carry a penalty in the event of any breaches, an FSC official told Complinet, speaking on condition of anonymity.

According to the FSC official, although the requirement to appoint independent directors was not entirely new, the commission’s latest move built on its existing corporate governance regulations. It further expands their reach to cover the entire spectrum of the financial services sector.

Securities investment trust enterprises and integrated securities firms which are not subsidiaries of a financial holding company, exchange- or over-the-counter-listed futures commission merchants, as well as exchange- or OTC-listed non-financial institutions each with a paid-in capital of at least NT$10 billion ($344.7 million), but not exceeding NT$50 billion ($1.7 billion), are the four additional types of firms in the financial sector now covered under the corporate governance regulations.

COLUMN-Two paths to failure on Dodd-Frank

capitol bldg 2 RTXX2LO_Comp.jpg(Scott McCleskey is a managing editor for the ThomsonReuters Governance, Risk and Compliance unit. The views expressed are his own)

By Scott McCleskey

NEW YORK, Feb. 14 (Complinet) – With all the chest-thumping about U.S. financial reform last year, you would suppose that the regulatory authorities responsible for implementing the provisions of the Dodd-Frank Act would now have the political wind at their back.

This is particularly the case given the tight deadline for most of the provisions — on or before the July 21 anniversary of the Act’s enactment. You would be wrong. Both sides of the aisle in Congress have taken or threatened steps which only serve to undermine the process of regulatory reform and leave the market with all the costs and none of the benefits of reform. (more…)

U.S. financial regulation: Three things to watch, and two not to, in 2011 – Complinet column

MARKETS-STOCK/By Scott McCleskey, Complinet

The past year was a busy one for those interested in financial reform – you know, Dodd-Frank and all that. But the new year will be even more fateful in shaping the markets for decades to come. It is likely to be the most critical of the post-financial crisis period. The reason is that Dodd-Frank only gave the regulators their marching orders, and 2010 mostly saw just the preliminaries to the really tough regulation. It will be in 2011 that actual rules will be proposed, finalized and implemented – and all by mid-year, if deadlines are met. It will also be when the Republicans hit the beach in the House and attempt to moderate or reverse many of the reforms already underway.

There will be a tidal wave of Dodd-Frank work, and some areas of focus are already obvious. The launch and first steps of the Consumer Financial Protection Bureau will be one, and the rather iffy implementation of derivatives regulation will be another. These items have been and will continue to be covered by this organization and others. But there are other items largely outside the Dodd-Frank ecosystem which bear a close watch over the coming year – and there are also some receiving a lot of press lately which can be ignored. (more…)

Asia regulators say G20 reform driven by U.S., Europe

By Daisy Ku and Rachel Armstrong

HONG KONG, Nov 29 (Reuters) – The lack of a unified Asian voice in the Group of 20 leading economies means the United States and Europe are driving the overhaul of global financial regulation with several of the new rules posing significant challenges for emerging markets, regulators said in a regional summit on Monday.

The G20 has endorsed a series of major reforms to banking and financial market regulation, which the five Asian members of the group and Financial Stability Board members Hong Kong and Singapore have signed up to.

But Asian regulators say a number of these rules pose significant difficulties for their markets, while others don’t address the way the crisis hit their economies. This, they say, is partly due to the fact that the United States and Europe find it easier to arrive at a common approach to regulatory change.

ANALYSIS-Wall Street mounts campaign backlash against Democrats

By David Morgan

WASHINGTON, July 27 (Reuters) – Wall Street executives who endured two years of blame for the U.S. financial crisis and now face costly industry reforms are turning against Democrats by shifting campaign contributions to Republicans.

Long a reliable source of big contributions for Democratic coffers, financial institutions in New York, Chicago and San Francisco are dialing back donations and vowing to shun lawmakers who pushed for the toughest provisions as reform moved through Congress to President Barack Obama’s desk.

Financial executives say they were unfairly blamed for the worst recession since the 1930s so that Democrats could deliver politically motivated reforms to angry voters — reforms that will now cost firms billions of dollars in revenue.

Final text of Wall Street reform bill is posted by U.S. Congress

The House of Representatives Financial Services Committee has posted the text of the the Wall Street regulation overhaul agreed by U.S. House of Representatives and Senate negotiators on Friday. The bill is headed toward final congressional approval next week although implementation will be bogged down for months in regulatory rule-making.

(more…)

Financial reform gives insurance a free ride

The following is a guest post by Marc Levinson, a  senior fellow for international business at the Council on Foreign Relations. The following opinions expressed are his own.

In a critical area of the financial reform bill that’s about to pass, Congress has lost its nerve. As senators and representatives met Tuesday to agree on key details of the final bill, they voted to give the insurance industry a free ride – and did so in the name of consumer protection.

The conventional wisdom, much promoted on Capitol Hill, is that insurance was the shining star as a crisis wracked the financial sector in 2007 and 2008. Tough state regulation is said to have kept insurers robust as banks tottered, leaving no reason for federal intervention.

“Don’t fight the Fed” gets new meaning in Senate debate

By Rachelle Younglai and Kristina Cooke

WASHINGTON/PHILADELPHIA, May 12 (Reuters) – The shaping of the U.S. financial reform bill has given a new meaning to the old market adage “Don’t Fight the Fed.”

Five months ago, many lawmakers wanted to confine the U.S. central bank to setting monetary policy and acting as a lender of last resort for banks.

Blaming the Fed for missing the warning signs in the run-up to the financial crisis, senators were preparing to step up their scrutiny of the central bank and strip its authority to examine and supervise all banks.

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