2011 Preview Part II – New Regulation

If you had to do an informal poll of our industry in order to ascertain people's expectations for the year ahead, there's one word that would crop up more often than any other: regulation.

Okay, so not everyone expects significant new regulations to be introduced across every facet of the financial services industry, but I think all would concede that certain regulatory changes are necessary and likely, and that the market is pretty much ripe for it.

But that's only half the story. The really interesting part of this discussion comes about when you ask people to articulate the specifics of the types of regulations likely to be introduced. Indeed, one of the most prominent themes at this year's Waters USA conference held in New York on December 6, was that relating to what the new regulations might look like and when they might be introduced. Members of our CIOs' panel discussion, most of whom have regular contact with the industry's regulators on both sides of the Atlantic, were undecided as to what the regulatory landscape might look like in a year's time. It seems, for the moment at least, that everyone is equally in the dark.

So, at the risk of being exposed for my inadequate anticipatory powers, below is what I think will happen on the regulatory front during 2011:

1. I think we're unlikely to see any regulation by the Securities and Exchange Commission in the US attempting to curtail high-frequency trading activities (and by association algorithmic trading) in the wake of the Flash Crash. The SEC might want to introduce new measures to ‘slow down' the markets, but I think even it would concede that talking about regulating such activities and actually implementing regulations around them are two different things. How, for example, would the SEC go about deciding how fast is too fast?

2. I think the main thrust of the 2011 regulatory drive will surround the business activities impacted by the Dodd Frank Act, which, when you scratch a little below its not-insubstantial surface, is pretty much everything. Most firms are still coming to terms with the extent of the Act and how it might impact their day-to-day lives.

3. We're likely to see a lot more written and discussed about the introduction of central clearing counterparties in the OTC derivatives markets as a way of increasing efficiencies and operational resilience, while also potentially reducing various risks associated with the trading of such instruments, especially when it comes to credit derivatives. This facet of the capital markets is simply too important for regulators to continue to ignore.

4. The European market is likely to see quite a bit of speculation about Mifid II and what the ‘review' might mean to market participants in the region. Whether any substantial regulation is likely to be spawned as a result of the review is unclear, although it's unlikely that anything resembling the original Mifid requirements will be forthcoming.

5. Finally, the way that regulations tend to be introduced - proposals, feedback periods, speculation, criticism of the regulators by market participants, frustration and only then the introduction of the final rules themselves - means that there will be a lot of time for firms to get used to the idea of having to comply with new mandates. Also, if the past is anything to go by, there tends to be a marked difference between what is initially proposed and what is finally introduced by the regulators.

New regulations are inevitable - they are a necessary evil and an integral part of the capital markets that all participants need to negotiate - and complying with such operational mandates can have a significant impact on firms' technology infrastructures. Those firms with the most operational and technological flexibility will find such moves the least disruptive.

Next time: Risk Management (please note that the publication of this piece depends on the snow conditions in Morzine, France).