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Strategies & Market Trends : Currencies and the Global Capital Markets

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To: accountclosed who wrote (1436)	3/26/1999 10:57:00 AM
From: Henry Volquardsen	Read Replies (1) of 3536

Antoine, I think the best form of regulation is the simplest. Regulating a product like derivatives is like trying to squeeze mercury, very elusive. When bureaucrats regulate (that sounds like it should be a Fox special) they tend to focus on specific, static issues. These regulations tend to be inflexible and do not respond to an evolving market. One of the things that bankers are really good at is designing products specificly to get around regulations. In fact regulations are generally an opportunity to make money. So my own feeling is that regulating derivatives is pointless. You are trying to hit a moving target and that type of regulation will be ineffective. The best way to regulate this situation is to go to the heart of the situation. The real issue is the banking system secure. Regulating specific transactions will never shut all the doors. So regulate what will make the banks more secure. Impose tough capital and return requirements. Conduct stringent audits of credit and all operational functions. This will do a much better job of securing bank saftey than regulating a specific type of transaction. Remember the issue with Nick Leeson was only tangentially a derivatives issue. He was using the simplest of derivatives, futures. The damage occured because of terrible procedures. His operations people reported directly to him and he was hiding documents. The derivatives were incidental, he could have created the same damage by making loans to bad credits and hiding the documents. A competent operations audit would have uncovered exactly what he was doing and the central banks already have the mandate to do that. Directional bets are under Fed scrutiny. When they conduct an audit they review the risk control procedures. They want to see limits and the rational behind them. They want to see how these limits are enforced and problems dealt with. The Fed is proactive on this. You ask Is there or should there be proactive supervision between the two extremes of due diligence and bailout? There is. The system stood up very well last year. No public money was required and there was no cascade. Yes some banks lost money but thats no big deal. Banks lose money regularly on loans yet we don't blame lending. Effective regulation does not prevent loses. It prevents failure and system wide problems.

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