As leaders from the world's biggest economies meet to thrash out a new world order for the global financial markets this weekend, a survey of Allen & Overy clients reveals that market participants would like to have tougher market regulation and a consolidation and restructuring of the regulators themselves.
The 131 respondents in Asia strongly support the creation of a supra-national regulator and the re-organisation of domestic regulators, such as merging the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) in Hong Kong. Asian respondents are also much more keen than their counterparts in other regions on tighter regulation of rating agencies and the establishment of a central counterparty for credit default swaps.
But, as partner Alan Ewins warns, the survey results need to be read in light of market conditions. ôThe responses are very much a matter of people sitting back and thinking about what would be nice to have to protect them,ö he says. ôWe're not necessarily saying this will happen.ö
Central counterparties and super-regulators are appealing prospects to many market participants in Asia today, for example, but they are also the stuff of pipe dreams. Other suggestions, such as stricter regulations on rating agencies, could even be counter-productive.
ôOne of the things we have to be careful about is that if you regulate the rating agencies, then the regulators can be viewed as ultimately underpinning and underwriting the issues,ö says Ewins. ôThat would produce some very unfortunate responses.ö
On the subject of Hong Kong's response to the minibonds saga, Angus Ross, a litigation partner, says that the regulators have acted appropriately.
ôThe paramount concern is respect for certainty and the rule of law, as that is one of the key selling points for Hong Kong as an international finance centre,ö he says. ôIt would be wrong to seek to move the goalposts against which prior conduct should be judged because it would undermine confidence in the rule of law and discourage compliance with existing laws.ö
While survey respondents in the US and the UK are strongly opposed to restrictions on bonuses and remuneration structures, Asians are much more evenly split. They are also the strongest supporters of increased regulation of hedge funds, although respondents in every region of the world agree they should face more oversight.
But, despite a few regional differences, there is a universal sense that market participants feel let down by the current regulatory framework. As one respondent says: ôBasel II imposed a huge regulatory capital reporting and management culture on international banks, but completely failed to prevent the destruction of capital through risk-taking, because it encouraged box-ticking (ie, reliance on credit ratings) rather than the exercise of good credit risk judgment.ö
The survey does not provide a neat answer to the problems facing the financial markets today, but it does at least highlight the strength of support for a fairly radical shift in the way the industry is regulated. There is worldwide support for greater disclosure of derivatives, the creation of a global quantitative standard for liquidity regulation and restrictions on the use of securitisation to take assets off the balance sheet.
Even so, not everyone is maximum bullish on ratcheting up regulation and some respondents warn against knee-jerk regulation of complicated financial techniques.
ôPlain securitisations, such as mortgage and SME securitisations, are products aimed at providing banks with funding, risk management and capital management, which is exactly what the governments are trying to do now that these markets have dried up,ö says an investment banker in the UK. ôThese products have true value for the entire economy and should not be castigated.ö
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