What’s the difference between a good lawyer and a bad lawyer?
A bad lawyer lets a case drag out for months. A good lawyer can make it last years. And investment lawyers will certainly look back on 2011 as upping the pace of some very fat years. No matter where in the world you’re trading, regulatory changes have affected the way you go about your business.
At the top of the pile are the Group of 20 obligations requiring OTC derivatives to be centrally cleared and traded on-exchange. Regulators from Sydney to São Paulo, Moscow to Mumbai are all busily drafting local legislation to meet their commitments. Europe’s own effort – the European markets infrastructure regulation (EMIR) – is presently with the European Parliament and the Council of the European Union for agreement on a final version of the text.
Short selling has also seen its fair share of new restrictions this year, with France, Spain, Italy, Belgium and Greece temporarily banning the practice on certain financial securities, and The Hong Kong regulator proposing in October that net short selling positions should be disclosed.
Legislative draftsmen saw their fair share of work in 2011.
Tell me about it. There’s so much new regulation, my head is swimming. Is this actually getting us anywhere?
Kafka would be proud… there certainly is some menacing complexity to the streams of paper that came out of Brussels and Washington this year.
On top of EMIR, Europe is in the throes of overhauling its Markets in Financial Instruments Directive (MiFID) and has even found time to create a new accompanying piece of Regulation, with a capital ‘R’, which nullifies the discretion of member states to modify the rules they way they can with a Directive. Much hinges on the outcome of the new rules, which include restrictions to electronic trading and the introduction of a new trading venue category.
At the core of electronic traders’ fears are proposals designed to prevent high-frequency traders (HFT) from abruptly withdrawing liquidity from Europe’s securities markets. To date, the regulators have refused to delineate HFT from broader algorithmic trading.
Despite widespread industry criticism, the European Commission is currently standing fast to proposals which would mean both algorithmic and high-frequency traders will face mandatory continuous trading throughout the trading day, with liquidity to be provided on a regular and ongoing basis, regardless of market conditions.
In a battle on another front, the Commission’s new organised trading facility (OTF) category, deliberately defined broadly as a catch-all for existing platforms currently not regulated, has been criticised by operators who see further complexity rather than clarity.
With the rules to take effect by the end of 2014, this one will run and run.
Across the Atlantic, bureaucratic desks are similarly weighed down with piles of new rules. The G20-endorsed Dodd-Frank Act has been delayed from its original July target date, following a September announcement by Gary Gensler, chairman of watchdog, the Commodity Futures Trading Commission, that some of the key rules will not be implemented until 2012, including the final rules for the newly created swap execution facility (SEF) category. The regulation has also come under attack from Craig Donohue, head of Chicago-based derivatives exchange CME Group, on the basis that it does not take sufficient account of the costs and benefits of the proposed new rules.
Even former Federal Reserve chairman Paul Volcker has said the anti-prop trading subsection of the act, which bears his name (the Volcker rule), is overly complex and “doesn’t have the purity [he] was searching for”.
As former US Supreme Court Chief Justice Warren Burger once said: “The more laws, the less justice.”
But the regulators must mean well. Aren’t they trying bring more clarity and fairness to the industry?
Sure, but good intentions don’t pay the rent. Overly complex, unworkable regulation will not help protect the investor or level the playing field. It’s more likely to increase costs and hinder innovation and the wider economy.
Take the proposed financial transaction tax which the Commission is proposing to implement on every trade of a financial instrument. A similar tax failed miserably when attempted in Sweden in the 1990s, drastically reducing volumes and triggering a mass exodus of trading to London. The Commission has admitted this is largely a revenue raising exercise intended to fill a funding hole left by a decrease in contributions by member states.
As a whole, the industry is certainly not against regulation per se. Lower risk and greater stability are two desires shared by every stakeholder, whether they be regulator, trader, portfolio manager or retail investor. But when forming regulation, some sense of moderation, clarity and regard for the market probably wouldn’t go astray.
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