Regulate FMIs but tell us what the ground rules are
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.
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