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The Trading Mesh

Bridging the Abyss between Regulation and Action

Mon, 28 Nov 2016 03:51:28 GMT           

This blog was originally published at the Bips Global website and is reproduced here with permission


By Lene Hansen


Far too many regulations fall into that dark distorting gulf that exists between the regulator and the practitioner who is - hopefully - trying to comply with or enforce them.  (It should be noted that this is not a new phenomenon, in fact some might argue that the Bible itself is a good example of this problem).

Within the finance industry though there are several levels between these two groups and, as with Chinese whispers, distortion is generally inevitable. One central issue though is obvious to us all. Regulations as a rule (pun intended) are not written as user manuals and their intentions are often unclear or poorly translated on a practitioner’s level. Then, as it is generally impossible for the practitioner to talk directly to the person who wrote the legislation it is inevitable again that there is uncertainty.

So groups that I will refer to as ‘translators’ have sprung up to somewhat fill the gap.  Consultancy groups like us chew up a lot of internet space and spew out a lot of shiny brochures ‘distilling’ the essence of these voluminous requirements. Within the industry, The Investment Association (IA) and the Association for Financial Markets in Europe (AFME) have put a great deal of effort into translation as well. The Equities Electronic Order Handling Questionnaire being a good example. 

These groups somewhat fulfil the role of bridging the gap and creating a market standard. And, to be fair, the result is often a close approximation (if not an extension or clarification) of what was intended by the regulator, but at what cost? There is clearly a massive amount of duplicated, expensive and unnecessary effort being expended here by expensive people. Now don’t get me wrong, I fully realise that a lot of our existences, mine included, are funded by these inefficiencies but there are times I wonder what a better world could look like. So, without venturing into the realms of the impossible and taking current technology into account, I would like to put forward a few thoughts on what our better world could look like.

Firstly, existing regulations would be rationalised within an inch of their lives. This would not have to be a Sisyphean task. In fact, several regulators already ask their staff and/or participants to suggest regulations or guidelines which could be scrapped and embrace a simple language approach. Obviously, this would be an ongoing and considered effort rather than a ‘Hit and Run’.

Secondly, we would attempt to address the insanity of jurisdiction. We have international regulatory groups, so why do we still have multiple regulatory groups worldwide passing legislation on the same products in slightly different ways and then arguing over the place and way that they apply? So, in our better world perhaps the regulators of the largest markets worldwide could work together more closely to align their new regulations as closely as possible, perhaps with an addendum of regional variations.  Just one clear overall guidance of how jurisdiction is enforced would be a world changer.

And while we are on the topic of worldwide markets why not take advantage of technology to utilise and share the statistics of how the legislation affected the market it was applied to? Clearly every market has its own foibles but if the characteristics are sensibly assessed then surely there are some truisms that could be applied across markets particularly as trading is increasingly dominated by the same global firms. Yes, there are already efforts being made here but we are not quite there yet.

Finally, we arrive at that old chestnut, how can we achieve a closer relationship between the regulators and the practitioners? If we take the view that the current approach has reached the limits of its efficacy, then what is a new approach? Well, there might be some answers afforded by technology. The reason I say this is that this blog came about as a direct result of work we were doing with one of our clients and the capabilities of their system. Their product ( is a counterparty management system which, once set up, basically allows practitioners to securely send and receive documents, particularly questionnaires, between a large group of recipients and monitor and manage the progress through one face page. All well and good and the product is quickly gaining market share with larger groups who are struggling with the reporting and record-keeping requirements of MiFID and Co., Again, this makes sense and is happily already happening but I would like to consider a few added benefits for those who are willing to push the envelope a little. 

Let’s start with the assumption that a large part of the problem between regulators and practitioners is that there is, market research aside, a largely one-way street of directives coming down and very little knowledge going back up. Part of this problem can be witnessed by the fact that the regulators generally seem to be operating at a time lag of at least a few years behind what is happening in the market. I believe technology – especially in relation to algorithms - has extended this gap and, as most of us are aware, there are often light years between what the regulators ask practitioners and what practitioners ask of each other. Well, one of the extra functions in Plia is something called a ‘Data Request’ which allows users to send their own bespoke questions or questionnaires to other counterparties. Innocuous enough but what if a major portion of the market used something like this and regulators could ask practitioners what their most common data requests of other counterparties were? Wouldn’t this open a window for the regulators as to what is really happening on the ground level? And, as it is possible to consolidate and filter the questions and answers across times and participants perhaps a serious quantifiable attempt could be made to see which regulations are working and which ones are just causing confusion and/or duplication. By tapping into the coal face in this way surely regulators could start to close the abyss of distortion between regulators and practitioners? It might put me out of a job but then again maybe, in a better world, I have better things to do.

About the author: Lene worked for the Australian Stock Exchange in Derivatives Risk and for the Securities and Futures Commission of Hong Kong in the Market Supervision and Intermediaries Supervision areas. She was a key person in the first Director's Disqualification litigation case undertaken by the Financial Secretary of Hong Kong; worked as a Regional Chief Operating Officer for ABN AMRO Compliance and supported the integration process for RBS in Asia as the Head of Programme Management for the region. Lene now works for Bips Global supporting companies with complex operational change requirements.