2012 Regulators in the Driving Seat
Posted by Jeff Wells on Tue, Jan 17, 2012
2012 will be subject to many political fluctuations given that the United States is in an election year. In addition, there are elections in Russia, France and Mexico. This will no doubt affect volatility of the markets and therefore data rates. Because of the heightened political discourse there will continue to be pressure to tighten market rules & regulations. In the US, in particular both SEC and CFTC are subject to the will of the people via Congress. As such, they are keenly aware of political trends.
The current dialogue has notably shifted to the extent that even main stream Republicans seem to be in favor of tougher regulation for the Street, or at least that’s what they are saying in public. This could be quite significant for market data vendors as government possibly becomes a market data customer in its attempt to monitor markets and as financial firms continue to invest in order to remain compliant.
Not surprisingly, the impulse to regulate has been particularly strong since the September 2008 debacle. Then the May 6th 2010 Flash Crash piled on yet more pressure for regulation and gave the rule makers a second wind. I keep thinking that a high water mark has arrived but Dodd Frank will take a long time to roll out and the Volcker rule hasn’t yet been implemented. Indeed, the comment period for the Volcker rule didn't close until 13th January.
As a consequence of the emergency rule making in 2010-11 there are now regulations to ensure that there are guard-rails to contain volatile conditions, new standards to prevent unsupervised direct access to markets and rules (in-the-making) for large traders to report their positions. In addition they are asking for a complete and robust audit trail capable of allowing the overseers to determine the cause of any incident considered worthy of investigation. Indeed, the SEC’s call for a massive overhaul of the current order audit trail system has a lot of wind behind it. The initiative is called CATS- Consolidated Audit Trail. It is not clear what the whole system will comprise, but the US financial industry would have to spend millions, possibly billions, to implement the vision.
On the other hand, there are signs that a high water mark has been reached after all. How so? Well, over the Christmas break the Canadian regulator wrote to the US regulators outlining their worries that over zealous implementation of the Volcker rule would affect their capital markets. http://www.sec.gov/comments/s7-41-11/s74111-54.pdf
Being Canadian, they are scrupulously polite of course, but they are absolutely correct in pointing out that the world’s markets could be adversely affected if the big banks, currently providing liquidity, are prevented from carrying out their customary activity in international government bond markets.
I also suspect that as the government continues be in a budgetary squeeze, the more grandiose schemes for capturing every single trade and quote from every market imaginable stay on ice.