World Economic Forum Annual Meeting 2008

  • Regulation and Capital Market Competition

    Friday 25th January 2008 - 4:00pm - 5:15pm

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  • Regulation and Capital Market Competition

    ·

    Marcus Agius

    ·

    Charlie McCreevy

    ·

    Duncan Niederauer

    ·

    James S. Turley

    Moderated by ·

    Howard Davies

    Friday 25 January

    Some key insights from this session:

    • The integration of global financial markets requires a corresponding harmonization of regulatory systems, including the mutual recognition of registration, disclosure, capital adequacy and accounting standards. Progress has been made, as seen by the adoption of the Basel I and Basel II bank capital accords, and the efforts to promote the convergence of International Finance Reporting Standards with the US GAAP. However, more needs to be done.

    • The past few years have seen a "sea change" in attitudes among US regulators, particularly at the Securities and Exchange Commission (SEC). US authorities no longer insist on the superiority of US standards, recognizing that in a fully globalized market it is not realistic to expect all participants to conform to the regulatory practices of one country.

    • While the recent collapse of the US sub-prime mortgage market – and the subsequent spread of financial volatility to other global markets – highlights the need for regulatory coordination and cooperation, it is important for regulators not to overreact. Policy-makers, in particular, need to avoid the temptation to pass legislation simply for the sake of appearing to "do something" about the crisis.

    • That said, a regulatory response to the crisis is inevitable. The financial services industry should take a proactive approach and consult with regulators about possible reforms. Given the complexity of the issues, any regulatory response will fail without "massive buy-in" from market participants.

    • The major credit rating agencies can expect increased regulatory scrutiny, particularly in the EU. Perceptions of conflicts of interest in their relationships with securities issuers, in particular in their compensation practices, ensure that "things will not remain exactly the same".

    • The crisis has also highlighted the danger of focusing regulatory attention in the wrong areas, based on perceptions of risk that may be misplaced. For example, recent years have seen repeated calls in the US and the EU for tighter regulation of hedge funds and private equity funds. Yet the sub-prime losses have been most heavily concentrated in the most heavily regulated entities in the system – the commercial and investment banks.

    • The trend towards cross-border consolidation of financial exchanges – as seen by the 2006 merger of the New York Stock Exchange and Euronet into the first transatlantic bourse – has helped "catalyse" the issue of regulatory harmonization. In particular, it has forced regulators to confront the conflict between the US emphasis on rule-based regulation and the European preference for principles-based standards.

    • Even with the US market, this conflict remains problematic, as seen by the differing approaches taken by the SEC and the Commodities Futures Trading Corporation (CFTC), which has authority over the listed futures and options markets. The SEC traditionally has favoured a rules-based approach, while the CFTC has shown a greater willingness to use principles-based concepts. Given the tight links between the derivatives and equity markets, this dichotomy is increasingly problematic. For this reason, the US Treasury has encouraged the two agencies to reconcile their differences.

    • In the wake of Société Générale’s recent "rogue trader" scandal, financial institutions will need to redouble their efforts to manage risk and prevent fraud.

Moderated by

  • Howard Davies Howard Davies
    Professor of Practice, Fondation Nationale des Sciences Politiques (Sciences Po), France

    Former: Chairman, Financial Services Authority; Deputy Governor, Bank of England. Currently, Profes...

Speakers

  • James S. Turley James S. Turley

  • Marcus Agius Marcus Agius
    Manager

    MA in Mechanical Sciences and Economics, Cambridge University; MBA, Harvard Business School. Former:...

  • Duncan Niederauer Duncan Niederauer
    Chief Executive Officer, NYSE, USA

    Formerly, 22 years with Goldman Sachs including MD and Co-Head, Equities Div. Execution Services fra...