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And Finally…

Sometimes it’s nice to get reassurance that you’re not alone in not getting something. As one who is used to the odd bit of (generally friendly) abuse – you should have heard most of the speakers at Forex Network Chicago last week – I don’t mind being told of my shortcomings, but I have genuinely been confused over where we stand on the imposition of regulation.

Last week’s FXN Chicago, which surpassed all previous events with a truly stunning turn out (to me anyway) – highlighted that I am not alone. The general level of debate and conversation was extremely high, thank to our great speakers, but what did strike me was the persistent uncertainty surrounding the subject of regulation. Words like “hope” being used on a panel discussing the future course of regulation is a little worrying of course, but to me it highlights how big the problem is.

Put simply, no-one seems to know what is going on and – this, in my opinion is the big issue here – regulation is becoming an increasing pawn in national and global political games.

Consider this – and take a deep breath. In the past week, we have seen one of the authors of the Dodd-Frank Act tell people to get a move on and implement it (at the same time as other regions seem reluctant to take it on) in FX swaps; we have seen a CFTC decision on position limits over-turned; Germany is seeking to impose fines on high frequency traders for being busy; and a CFTC commissioner has accused his own commission of creating instability in swaps markets. It’s quite breathtaking how much is taking place here and while financial institutions are not blameless (we have to remember what kick started this whole process) at the moment they are innocent (and confused) bystanders.

To opine on all of these issues would take much too long, possibly we can return to it at a later date, but I do have the brief version in the interests of readers’ sanity and brevity (and because the jet lag is getting the better of me).

The court decision on CFTC position limits is a good thing, if for no other reason than it may put a brake on the speed of the CFTC’s work. I get the feeling CFTC is trying to rush through as much as possible and has persistently (and wilfully on occasion) ignored the wider impact of its work. A decision that makes CFTC consider things more can only be good. Position limits may not be a bad thing, but the framework needs to be created use unemotional, apolitical sense.

Scott O’Melia’s criticism of  CFTC’s “mad rush” to implement swaps rules is a reinforcement of my original point – CFTC needs to approach this in a calmer mood and hopefully sensible, workable and effective regulation will be the result.

If the EU, driven by Germany, implements rules on HFTs that involve fines for excessive activity (which as I understand it is being proposed) I can only see chaos emerging. Germany is seeking to prevent the growth of the strategy in European markets, but such a view is almost Gensler-esque in its parochialism. Global markets are just that – they are inter-linked. If Germany thinks there is a problem with HFT (and it is certainly not alone in thinking there is) then it should work with global authorities to impose a global framework – not go it alone which will inevitably fail.

Obviously the most pertinent observation is Rep. Barney Frank, he of the “Frank” in Dodd-Frank, telling the US Treasury to get its act together and make a decision on FX swaps and a possible exemption. There is little I can add to previous statements on this issue – such a move would damage the very heart of the US economy that the Dodd-Frank Act sought to repair.

Corporate hedging would be more expensive, as would hedging foreign currency exposures in other asset classes. This means that corporates will be employing more people to manage the financial trading aspect of their business and less on the core business of manufacturing, and that asset managers will see ultimate performance undermined by increased hedging costs.

Of course, there is an alternative. Corporates and asset managers can ignore currency risk and we will inevitably see a financial disaster of some sort or another – and the very legislators that created the problem, will bleat about the outcome – and in all probability impose yet more inappropriate and dangerously misguided rules.

So it’s a worrying time at the moment, and I am glad it is not only me who is concerned and confused. There was one good thing uttered by all these players in the regulation game last week – indeed it was by Representative Frank who called for swift action and clarity for market participants. This, clarity and action, is what financial markets want, indeed need, but it has to be a coordinated effort around the world.

A lack of clarity and action are often seen as characteristics of those politicians at the more useless end of the scale. To me, the fact that we are still in the dark – still uncertain over what we are expected to do in the new “safe” world – highlights how this process to reform markets has been hijacked by political interests everywhere. The lack of political leadership around the world is not a subject for this column, but its impact is certainly being felt in our markets.

Colin_lambert@profit-loss.com

Profit & Loss

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