09.16.2011

Regulation Considered Ineffective

09.16.2011

Alternative investments trade association AIMA and its members see the enhanced regulatory landscape as an unnecessary burden.

Post-financial crisis of 2008, politicians and regulators throughout the United States and Europe have worked to improve regulation of financial markets and participants. The Securities and Exchange Commission in addition to Congress took a “better more than less” approach believing that having safeguards in place for “what if” situations would be more beneficial to the economy.

Such regulation and kneejerk reactions have proved relatively ineffective. Short selling bans throughout Europe have not worked out as well as hoped. The bans seemed justified a few years ago but recent bans proposed throughout Europe remain largely ignored by major G20 countries such as Germany, Switzerland and the UK.

“We do not think these bans will help the current market situation,” AIMA Chief Executive Andrew Baker recently noted in a statement. “Past experience has shown that bans on short selling do not prevent market falls and indeed can exacerbate volatility. Independent academic research also supports this conclusion.”

One of the main issues that concerns portfolio managers and traders is that many regulatory agencies are understaffed, underfunded or in some cases, both. The lack of manpower leaves regulators scrambling to fill the gaps where problems exist.

Things could soon change, however, as the Senate unveils new budgets for both the CFTC and SEC that would boost budgets in order to help the agencies implement strategies dictated by Dodd-Frank.

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