This checklist explores how the regulation of financial markets has become international in outlook.
As financial services has become a global industry, regulators and compliance officers increasingly need to be aware of the regulations—at least on a general level —in other major financial centers, and the broad principles of those regulations. This gives them a context in which to interpret rules and underlying regulatory concepts elsewhere.
Comparative views with other regulatory systems enable regulators to develop a more subjective approach to their own and other systems of regulation. If other financial centers have developed different principles and rules: Why is this? What are their objectives? Could they be integrated at home? How can varying rules be met in different centers?
The current trend is for policies to be developed by international groups, so any regulator taking part in such discussions must have a solid understanding of international principles of regulation, cooperation, and enforcement.
The financial crisis of 2008/09, which had its roots in the 2007 US subprime mortgage crisis, has revealed that current regulation falls well short of what is required to maintain a coherent and stable financial system in individual countries, and around the world. The challenge now is to come up with new rules and new or modified institutions that will reduce systemic risks, yet still allow innovation and keep unnecessary burdens to a minimum.
The speed of change in financial markets has accelerated, with the development of new trading strategies and new products, linking assets, markets, and currencies in new ways around the world, and this has created new risks. Thus, all regulators need to understand the problems and management of systemic risk. Measuring systemic risk requires better information, which, in turn, necessitates the review of company transparency, disclosure and reporting, and data collection from more institutions. The rules themselves must be improved to reduce systemic risk, and there needs to be improvements in the robustness of the financial infrastructure.
Regulators need to increase the levels of international communication and cooperation with other regulatory organizations. International groups include the Basel Committee on Banking Supervision, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors. Standards developed in international forums must be backed by economic analysis to achieve the best regulations. Global standards from these groups are adapted and applied to local markets.
What the financial crisis of 2008/09 showed beyond any doubt is that the financial system is truly global. No large economy was immune to the problems. How could subprime mortgage failure in the United States cause a worldwide economic collapse? The question is rhetorical, but, whatever the answer, the fact remains that it did. No national regulator could have avoided the crisis, even if it had foreseen it. Therefore, it is evident that the financial situation in one country is driven by what happens in others, and it follows that the financial regulations of one country can affect all others. This has underlined the need for far greater coordination among regulators on a global basis in order to avert future worldwide economic disasters.