Fear and Loathing in London

It is, as the proverb goes, raining like the proverbial in England's fair capital this summer. Just in time for the Olympics, naturally, but good news is on the way according to the Met Office. Apparently, the jetstream that dictates the weather on this island is moving away from being directly over the capital, and thus, we may get proper August weather soon. Not so for the dark and stormy clouds hanging over the City at the moment.

Among the London Interbank Offered Rate (Libor) scandal, the money laundering scandal at HSBC, the tech collapse at NatWest and other areas, the mood must be rather bleak. Further afield, the European debt crisis continues unabated and regulatory uncertainty continues to promulgate with a suspended vote on the Markets in Financial Instruments Directive (Mifid) review until September. All of this creates a perfect storm on the banking side, which some attribute to other factors.

"To my mind, the Libor investigation is politically motivated," says Will Rhode, director of fixed income research at TABB Group in a commentary note. "It is one thing for an industry to lobby and cajole regulatory bodies, it is quite another to attack economies and nations. The British government will undoubtedly lament the fact that City profits are being curtailed by European regulations but there isn't much it can do to defend it. Not only are the international powers lined up behind the European Union, even the country's own voters loathe the industry. It would be an extremely brave politician to rush to the defense of the banks in today's atmosphere."

Fear and Loathing on the Audit Trail
Things aren't so great Stateside, either. Peregrine/PFGBest's collapse highlighted, again, the level of fraud that can be committed with apparent ease in the Futures Commission Merchant (FCM) space. Barely a year after the collapse of MF Global, the fraud being committed by apparently falsifying bank statements sent to a PO Box, edited in Photoshop, and dispatched onwards to regulators beggars belief. Where are the systems, on the part of the regulators, to detect such fraud? Why does the bank not match up its own records, independently of the company, to those submitted to said regulators?

It's one thing to demand that brokers, clearing houses, exchanges and banks have adequate technology in place to provide compliance with a proper oversight function. But it has to be a two-way street, in the sense that regulators need to get a handle on their facility to actually be overlords of a vast, sprawling and, at times, complex area of industry. At Sifma this year, the US Commodity Futures Trading Commission (CFTC) chairman Scott D O'Malia said that the regulator would be beefing up its technical capacity in the months to come, and it's probably shown itself as being the most forward-looking, technologically, of the regulatory bodies. The Securities and Exchange Commission, too, has now mandated electronic audit trails to better aggregate and analyze the state of the market. Whether it can actually use the data, and has the resources to act on it, is another question entirely, given Washington's propensity to send it running with less and less money each year.

It's one thing to demand that brokers, clearing houses, exchanges and banks have adequate technology in place to provide compliance with a proper oversight function. But it has to be a two-way street.

In Europe, the over-the-counter (OTC) derivatives market will be transformed with the mandated use of central counterparties (CCPs), and the reporting of data to trade repositories. This will give the European Securities and Markets Authority (ESMA) a holistic view of what's going on in the market, say policy chiefs. But this data is still collected, organized, cleaned and then submitted by the trade repositories themselves. It's another example of the buck being passed, and while bodies actively involved in trades will be able to do this, as PFGBest and MF Global demonstrate, that is not the problem. That is not the problem at all.

If you'd like to talk CCPs and trade repositories, FCMs or Libor, or anything else that you think might be worth a mention in next week's letter, please feel free to give me a call on +44207 316 9811, or send an e-mail to james.rundle@incisivemedia.com.