Our first guest blogger for Sibos in Boston is Tim Lind, who during his time at TowerGroup did a 'Heidi Miller' on the securities industry with his aptly titled, "A Eulogy for STP and the Asset Manager," which blamed poor STP on custodians' inability to understand what fund managers really cared about, alpha.
Lind is now managing director, strategic planning, for post-trade pre-settlement solutions provider Omgeo, and ahead of his "intellectual battle" on Tuesday in the Sibos Fund & Investment Management Forum debate, Lind calls on the industry not to rely on regulation for innovation.
On Tuesday, I will be speaking on a SIBOS panel, against the need for more prescriptive regulation. Whilst I am sure it will be entertaining for the purposes of the debate to be on the side of good versus evil, we all know that it isn’t that clear cut. Whilst no one wants to be burdened by onerous rules and regulations, guidance from regulators plays an important role in shaping behaviour in the securities industry.
But it’s not just the role of the regulators to initiate transformation. The institutions that drive our industry must show leadership in putting the interests of the investor first and foremost. Just as doctors are bound by a ‘Hippocratic Oath’ to do no harm to their patients, shouldn’t we expect the leadership of our industry to uphold the interests of the investor with the same zealousness?
Current discussions around the pros and cons of principles- versus rules-based regulation are turning attention away from the industry‘s responsibilities. It may appear easy to criticise the SEC for implementing a regulatory overload, or to praise the FSA for its apparently more enlightened approach, but the responsibility for identifying pockets of risk and initiating ‘palatable’ change lies with securities firms and industry bodies as well as regulators.
In a 2004 speech addressing the mutual fund scandals in the US, William Donaldson, then chairman of the SEC, summarised the point beautifully. “Opportunity may only knock once, but temptation leans on the doorbell. As much as we may wish to, we will never be able to set and enforce rules that govern every situation in which an investment adviser’s employees might be tempted…”
The SEC has made it clear they expect the industry to follow the highest level of ethics, not because they should fear enforcement (which of course they should) but because it’s their responsibility as a fiduciary.
That said, threats of regulation, rather than regulation itself, have proved effective in the past. Rather than issue an edict, the Federal Reserve threatened to intervene unless the world’s biggest banks reduced their credit derivative processing backlog by 30%. The banks responded to the threat, achieving this goal and even outlining their own new target of cutting the backlog of unconfirmed credit derivative trades by 70% in a letter to the Fed.
The European Commission took a similar approach when it decided against issuing regulation to increase transparency in European Clearing and Settlement. Instead it issued a Code of Conduct which seems to be working.
I admit that it doesn’t always happen this way. The Canadian regulator, the CCMA, having seen no evidence of self-transformation, decided to tackle one of the most risk-laden spaces in the trade life cycle. The regulation, known as National Instrument 24-101, mandates that institutional trade matching, or same day affirmation (SDA), be adopted by investment managers in the Canadian financial market by the summer of 2008, via STP. However, by having the option of a phased approach over a few years, firms have at least been given time to get their back-offices in order.
As a community, the securities industry is evolving at a faster rate than ever before. Technology is empowering the rate of innovation, and it is clear that the entire industry must constantly review ways to ensure that this change can continue safely, preventing systemic and market risk. It’s not just a question of rules vs. principles, it’s a question of responsibility.
