Yesterday I sat on the closing ‘Crystal Ball’ panel session of Sibos’ Market Infrastructure stream. My fellow panellists and I were asked what was going to be high on the radar for FMIs (financial market infrastructures) over the next three years.
None of you will be surprised to learn that regulation was at the top of everyone’s agenda.
FMIs and the financial services industry as a whole must now get used to a constant flurry of ever-evolving regulation. It would be nice to say that the pendulum will go back to a pre-2008 situation but it would be unrealistic.
This means that FMIs and other institutions in the value chain must now readjust their business aims and aspirations; in a post-crisis world, the compliance burden will continue to cost everyone significant resources both in time and money.
Those of us in the market infrastructure space are facing a particularly heavy torrent of regulation. From Emir to CSDR, Dodd-Frank to Basel III, the list goes on. In isolation, any of these regulations would be manageable but taken together, they are a huge challenge.
As FMIs are the backbone of the financial system, it is right that we should have a stricter regulatory regime than other types of financial institution.
No-one would argue that FMIs should be allowed to take proprietary positions. However, I would like to see a more principles-based approach to regulation rather than a prescriptive approach accompanied by much clearer guidelines for FMIs as to how regulations should be implemented.
As a case in point, infrastructures quite rightly have a key part to play in maintaining the integrity of the financial system through the flow of high-quality collateral. If you ask any CSD, each one would agree that CSDs shouldn’t compete on quality of collateral.
However, we don’t necessarily agree on what I high-quality collateral. What do terms such as ‘liquid’ and ‘easy-to-understand’ mean? Regulators have a role to play here by guiding FMIs on issues such as these rather than letting them fly blind.
Compliance departments at FMIs are tasked with not only meeting the demands of current regulations, but pre-empting future regulations that have yet to be implemented.
The approach of regulators currently is to implement regulations without necessarily having a clear understanding of their interdependencies.
When unintended consequences manifest themselves, regulators are in the habit of issuing ‘sequels’ or ‘fixes’ to regulations. We’re now in the habit of seeing ‘Mifid, ‘UCITS’ or ‘Basel’ with ever-lengthening Roman numerals attached to them.
The danger here is that FMIs can then be penalised in retrospect for not envisioning future regulations adequately enough. FMIs have a critical role to play in the stability of the financial systems but we shouldn’t be the final safety net that covers the mistakes of other players in the value chain.