The regulatory trains in Europe and the US have left their respective stations and are headed down the tracks, but they will change tracks many times along the route before reaching their destination. Thick tomes of proposed operating rules have to be interpreted even as interested financial services parties line up to persuade regulators to change tracks (in order to accommodate their particular demands). Passengers should be prepared for delays.
The significant regulatory rethink in Europe on two levels - derivatives and MiFID II, combined with the slow-drip interpretation of US Dodd-Frank rules are leading to a thick “London Fog” on both sides of the pond. While some market participants are wanting to act but experiencing confusion and misunderstanding, others are quite clear in their approach to the unknown – wait and see. From banks to brokers and funds to financial advisors, everyone is looking for clarity.
What we know so far is that both regions want to move as much OTC trading as possible onto clearing platforms; and both support setting position limits by trader type to try and spot speculative activity. The US and the UK support splitting banking activities from speculative, or proprietary, trading. The US, UK and EU all seem agreed that hedge funds should at least be registered. All are under short deadlines to implement new rules. Some deadlines from the Dodd-Frank Act are slipping, while others remain intact. And MiFID II’s draft publication is scheduled for July.
There is an additional kink in the UK's track, where there is an impression of a regulatory void now that the Financial Services Authority is being broken up.
While the US and Europe hurry to regulate the rest of the world has to scurry to catch up. Until the G20's plans are in place in late 2012 there is a lack of harmony - a global regulatory framework that is full of holes and pitfalls. Regulatory arbitrage is a hot topic and has already begun with the shift of trading personnel to more lightly regulated areas. Transparency is not well served by disparate regulatory frameworks.
The ultimate goal for regulators has to be visibility; the ability to see across geographies, asset classes, exchanges and market participants. Cross border trading is a reality and problems can happen - as we’ve seen - so regulators do need to cooperate, just as we are already seeing with the US and UK.
Market participants cannot really afford to wait for regulatory harmony, however, nor can they wait for local regulatory clarity to satisfy their own need for visibility. Hot button issues such high frequency trading, algorithmic trading, dark pools and flash crashes (or splash crashes) may all be clarified in due course. But likely some issues will remain open for a long time to come. Regardless, firms need to move forward now, carefully of course, in order to move smoothly into compliance.
Despite all the noise to do with algo and high frequency trading, the changes that regulators and exchanges are making are to try and better contain HFT issues, not to take HFT away. How trading is conducted and governed may change, but liquidity, reduced spreads, and lowered trading costs need to stay.
Using surveillance and monitoring technology alongside HFT will not entirely prevent flash crashes or fat fingers, but it will go a long way toward helping you to protect yourself when these things happen. If you can sense problems and protect yourself when something untoward occurs, you won't get caught in a 'deer in the headlights' moment.
Don't be the guy standing on the track when the train comes along. The 'deer in the headlights' will not win against the barrelling train. Be the guy (or the deer) who heard the whistle and got safely out of the way.
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