“We’ve all seen those westerns where a bar-room brawl starts with one punch, then escalates into chaos, and then a sheriff comes in, fires two shots into the ceiling and it’s all calm again. In the world economy, there is no sheriff in charge, the medical teams do come in but each looks after only their own patients at the same time as stipulating what medicine everyone else has to take.”
Martin Wheatley was speaking at a White & Case event in Hong Kong. He is sheriff (chief executive actually) of Hong Kong’s Securities and Futures Commission and was explaining how regulation evolves.
At the top of the pyramid, he said, is the G20, which has no authority save a moral one, nor any ability to put into operation what it decides. Its major job (as he sees it) is to generate a press release which will play well to the popular newspapers of the countries whose leaders have turned up.
Next rung down is the ‘Financial Stability Board’. This august body, until 2007, predicted that the biggest area of potential risk was that of a major hedge fund blow-up.
“The Financial Stability Board through a process of moral suasion tells people not to be outliers and risk being named as a non-competitor,” says Wheatley.
Beneath that are boards that set standards. Yet even these standards are only voluntary. It is further down the architecture that you find someone with legal power, and such implementation can only be conducted at national level. That process can be slow.
“Bank regulators took over a decade to move on Basel II,” says Wheatley. “Securities regulation usually takes a couple of years. There is a trade-off between speed and getting it right. For example, the focus on bankers' pay and bonuses ended up with their basic pay actually being increased.”
Likewise, in his opinion, what eventually emerged from the debate about the role of ratings agencies and short-selling does not appear to have solved the problems originally tagged.
The aim of the regulatory moves are not to prevent a failure ever again, but to stop a firm being ‘too big to fail’ (and then failing). The Basel rules ensure sufficiency of capital. Bank supervision is more intrusive. There is more reporting and transparency about opaquely-traded instruments.
As a result of this, we have new acronyms, denominating such behemoths.
“Sifi” means “Strategically Important Financial Institutions”, and it has spawned two offspring, a ‘D Sifi’ meaning a domestically important (strategically important financial institution), and a ‘G Sifi’ meaning a globally important (strategically important financial institution). Got that?
We may be hearing a lot more of those acronyms in future, especially when they collapse, more so if it's due to a repetition of exactly the same things that already went wrong and weren’t fixed.
Now the SFC is busy developing a code of conduct for ratings agencies, is gathering more information about short-selling, and is conducting a survey of hedge funds to learn more about their activities.
“I thank my lucky stars when I hear him saying all this that we are in an environment like Hong Kong,” said one hedge fund manager sitting to the left, making a note to fill in sheriff Wheatley’s questionnaire. “Yes,” chimed in a grand lady of influence sitting to the right “Hong Kong is such a lubricative environment.”