10 Years of Regulation


Looking back at the global financial crisis of 2008-2009, it is reasonable to posit that markets were under-regulated in 2007. But the reaction to the crisis has been muscular in both the U.S. and Europe, and many market participants and observers say the 2017 landscape is characterized by over-regulation.

It has been an active 10 years for regulators of financial markets, and the pendulum has shifted.

In the U.S., Dodd-Frank was signed into law by President Obama in 2010, and the ensuing seven years have seen the rollout of the legislation, as well as calls for rollback or even repeal, most prominently by President Trump, who took office in January 2017. The Securities and Exchange Commission and the Commodity Futures Trading Commission have stepped up their oversight of the markets, for example with the in-progress Consolidated Audit Trail, and multiple other regulations directed at electronic trading.

In Europe, Basel III was big, and MiFID II is expected to be bigger.

Market reception to the waves of regulation has been mixed, at best. Some participants agree with the broad intent of rules, but they find fault in how rulemakers are getting there. Other participants say the rules themselves do more harm than good.

JPMorgan Chase CEO Jamie Dimon has been a strident critic of the newly re-regulated marketplace, especially as it pertains to bank capital requirements. .

“During and since the crisis, we’ve always supported thoughtful, effective regulation, not simply more or less,” Dimon wrote in a letter to shareholders earlier this year.

“But it is an understatement to say improvements could be made,” he continued.  The regulatory environment is unnecessarily complex, costly and sometimes confusing. No rational person could think that everything that was done was good, fair, sensible and effective, or coherent and consistent in creating a safer and stronger system.”

Goldman Sachs CEO Lloyd Blankfein has taken a more measured tone; at one point he called regulation “burdensome”, but more recently he said that some parts of Dodd-Frank are beneficial and he would not support a full repeal of the regulation.

Regulation continues to be a hot topic at industry conferences. Just a few years ago, compliance was said to be the only growth area for Wall Street professionals; that has dialed back some but still, the post-crisis regulatory road has been a long one.

The market structure concept release came out in 2010, but was largely ignored following the ‘flash crash’” of May 2011, said Joanna Fields, founding principal at Aplomb Strategies. “The effects of the flash crash continue to haunt us in a myriad of ways from fiction, “Flash Boys” to regulatory reality:market access, Limit Up – Limit Down, and the consolidated audit trail (CAT).”

“In 2013, the SEC formed the Equity Market Structure Advisory Committee, which focused on best execution and maker-taker pricing. Unusually, the EU and not the US will take the lead and roll out extensive changes to best execution disclosure with MiFID II,” Fields continued. “Launching interminable regulatory pilots has been an expensive trend over the past decade, from the Penny Pilot the Tick Pilot in 2016. I doubt with Brett Redfearn in his (Division of Trading and Markets) chair down at the SEC, pilots will be as frequent.”

Going forward, “cybersecurity will continue to be a focus,” Fields said. “I also think that regulators are going to continue to focus on the impact of technology and electronic trading.”

President Trump represents a big departure from his predecessor, at least in regard to viewpoints on regulation. How that translates into actual changes at the trading-desk level remains to be seen.

“With the current administration there is increased uncertainty of recently approved regulations (e.g. DOL Fiduciary Rule), which places pressures on firms to choose whether to act or wait,” said Matt Grinnell, compliance officer for Fidessa’s buy-side division. “More generally, there is certainty that legislative priorities are shifting to less regulation, but the process is sure to not be a smooth one.”

Over the next 10 years, Grinnell expects less banking regulation and more shareholder protection as the retirement population grows. “Also there are certainly opportunities for more malicious use of technology which will bring with it pressure for regulatory intervention.”

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