By now you’ve probably seen that a deal was reached this
morning by the House and Senate on regulation. Some would say it waters down
provisions from the tougher Senate bill, limiting rather than prohibiting banks
to trade derivatives and invest in hedge funds. This articles describes it as
banks “dodging a bullet” http://www.businessweek.com/news/2010-06-25/banks-dodged-a-bullet-as-u-s-congress-dilutes-trading-rules.html
We applaud the superhuman efforts put into the new financial
regulation bill by the U.S. Congress and the House of Representatives. However,
as I’ve said many times, transparency and consistency are critical to successful
regulation in the capital markets. One could be forgiven for fearing that the
watering down of the regulations, including the Volcker Rule, may create more
havoc rather than increase transparency and consistency.
One thing is for sure – there’s going to be a raising of the
priority on handling the complexity and requirement for real-time risk and
surveillance within institutions. Risk managers and C-level executives
concerned about minimizing risk and maximizing capital will need to view trading
positions and limits across the firm, including, if permitted, derivatives that
are 'spun out'. Ideally the risks should be aggregated and analyzed, in
real-time, giving the ability to detect and prevent “accidents”. Pre-trade risk
management will be increasingly important, as firms seek to maintain capital
requirements at all times.
A top-down approach to risk where managers can see, in a
single view on a dashboard, the risks across all asset class silos has gone
from a “nice to have” to high on the wish list – but many still wonder if it
actually possible. Continual monitoring of trades in real-time can help to
prevent exceeding trading limits, prevent mistakes and catch market abuse.
p.s. Many thanks to all the comments from market
practitioners who comment that technology can't solve all the problems for
Regulators, Banks and Trading Venues. I completely agree! But we can go a lot
further than what happens right now. But of course technology is only one of
the approaches. Changes in regulation is another, as is increased transparency,
improved reporting (e.g. from fax to real-time data!) etc. etc.
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