With Philippe Guillot, Executive Director, Markets Directorate, Autorité des marchés financiers
The entire regulatory process incorporating how the regulators enact incoming rules, and how we interact with the industry is changing. MiFID I was voted on in 2004 and implemented in 2007, then there was the financial crisis of 2008 which led to further talks resulting in MiFID II, which was voted on in 2014 and is due for implementation in either 2017 or 2018.
From these timescales it is clear that ‘legislator time’ is completely different from ‘market time’. The legislator makes regulatory changes every ten years or so whereas markets move every microsecond. Between the two, there is a need for constant vigilance in the function of markets. This has created a new role for the regulators, which we call ‘dynamic regulation’. Even a few years ago, this extension was not really possible because regulators were only enforcers. The evolution has come about due to the increased electronification of the industry, linked to the fact that there is now more data available, an increased capacity to store that data and new methods of comparing data. This is the big ‘data evolution’ experienced by every industry, but in particular the financial services industry.
The amount and quality of information available over the last 20 years has completely changed the processes undertaken by proprietary traders, execution brokers and financial analysts. That same information is also used by asset managers who themselves have a variety of new strategies which changes the trading and regulatory environment. Today’s market microstructure is different from tomorrow’s market microstructure and from yesterday’s. Into that mix, we need to be able to adjust the regulation accordingly. Regulation exists in order to define a floor and a ceiling on what firms can do, must do, and could do. We look at a firm’s actions from every aspect and we see that, in the context of regulation, they can either be doing too much or too little, and what we want is a regulatory environment where everybody can work and trade together in a balanced ecosystem.
Added to that, a dynamic regulator has to base its judgements on the data it receives, which largely comes from within the industry itself. As we base our judgements on that data, it is in everyone’s interest to ensure that the data is comprehensive, clean and understandable. We have to look at every link of the data chain because everyone who is producing, cleaning and using that data has to share responsibility for its quality.
This puts us all into an environment where we have been benefitting each time there was a new layer of regulation. We all gained from MiFID I because we started to receive data from MiFID I that we were not getting before. EMIR regulation into derivatives resulted in our receiving new data on derivatives that had not been available before. And we expect that we will benefit from MiFID II in the same way because there will be new data available as a result. It’s an ongoing process of learning and adjusting which must be done by each link in the chain. This means we need to collaborate as an industry to ensure that the decisions we make have been empowered by the sets of regulations and are based on proper data. It’s critical that the data received is reliable as this allows us to help prevent problems in the industry rather than merely enforce the rules. Prevention only works through collaboration.
For instance, the simple fact that firms need to report new areas, such as derivative positions, puts the industry into a virtuous circle. Companies have come to us saying that new regulatory obligations had forced them to look at what was happening inside their own services, making them aware of operating inefficiencies and areas where unnecessary risks were being taken.
Role of global regulation
All markets are interconnected and activity in one market will impact on everything else. Regulation is not homogenous, there is local regulation, but it could be national or continental. However, in order for regulation to be efficient there needs to be a global approach. The role of organisations like the International Organization of Securities Commissions (IOSCO) is critical because they are the best link between all the various agencies irrespective of their location.
IOSCO produces a broad set of principles, but if all regulations are taken locally and adhere to IOSCO principles then there will be regulatory convergence. Obviously because IOSCO is global, it cannot go into as much detail as local regulations. However, if we refer back to the earlier point about regulation defining a floor and a ceiling, then IOSCO can describe both of these very easily and from that we can build different layers at a national or international level.
Limit to collaboration
It is important that we remain close to the industry as when new regulations are implemented, we need to hear what the industry is saying in response to those new regulations. We have to be able to listen to what the industry has to say, but equally be detached enough in order to properly enforce the regulation.
During that listening process, it is good to remember (from the regulator’s standpoint) that the industry may have a vested interest in what it is saying, which is why it is important for the regulator to listen to everybody in the industry so as to distinguish what is vested interest and what is genuine concern. The industry can help here too, as the more objective they are, the easier it is to have a constructive dialogue.
We cannot say that we must not talk to the industry because that doesn’t help produce proper regulation. But at the same time we cannot say we will do whatever the industry wants because that leads to other problems. We have to meet somewhere in the middle. There has to be a balanced approach.
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The Changing Role Of Regulators
