Cross-infection in financial regulations: tracking down the consequences

A working group in the UK is now focusing on the myriad consequences of financial regulation being imposed in the clearing and settlement sector. The regulation subject group of the Clearing and Settlement Working Group is concerned that with so many regulations currently coming at the financial services industry, there is little practical way for any one organization to keep all the strands correct. This can cause non-compliance fines and loss of reputation; failure to respond to business swings; money and time wasted on unnecessary compliance; waste of cost and time; and increased risk, resulting from unexpected industry changes from combinations of regulations or responses to regulations.

Greg Caldwell, who chairs the regulation subject group of the Clearing & Settlement Working Group (CAS-WG), said that for the clearing and settlement cycle alone they have decided that they “have to consider 9 major regulatory initiatives impacts on the 16 different types of market participant for each of the 5 major stages of the clearing and settlement life-cycle. This is a complex matrix and the only way that senior managers of firms can really address it is to deal with each small chunk at a time.” One senior compliance manager told Caldwell that his team does not have time to consider whether the advice they gave about the last regulatory change was correct or turned out to be practical, they only have time to move on to the next one. As a result the combinatorial effects, the first and second level implications of the changes, are not going to be considered very scientifically.

One example of ‘cross-infection’ is short selling regulation in Europe for equities and Credit Default Swaps. LCH.Cleranet plans to impose penalties and buy-ins on anything that clears on EquityClear (amongst others). Equity trades are also going to be captured by CSD-R and its settlement discipline regime, so in the case of a UK Equity clearing at LCH and settling at Crest trading firms can get hit for the same trade in two places LCH under short selling and Crest under CSD-R. How many others will we discover as we go along?

Caldwell’s argument is for the industry to come together more and pool what it knows and what it can do to forecast the future. The Clearing & Settlement Working Group in London is effectively ‘crowdsourcing’ regulatory research and opinion. The group has been set up with the sponsorship of the Financial Services Club, BT and The Realization Group to provide what Caldwell calls a ‘test lab’ for regulatory change. One part of this is developing the “implications matrix” of regulatory initiatives versus industry participants and another is creating a model of the market infrastructure which will be built into software to allow the implications to be studied from the point of view of standards, risk and any other perspective that participants would like to take. One of the key principles of the sponsorship of the CAS-WG is that it is open to all. The idea is that the sell-side, buy-side, clearing houses and all other parts of the industry can put in as much as it can and reap the rewards of a holistic perspective.

The CAS-WG can be reached here.

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1 Comment. Leave new

  • Edward Sankey
    December 3, 2012 5:49 am

    Multiplicity of regulation can bring its own risks, lead to regulatory arbitrage, reduce competition and ultimately could mean that regulatory objectives do not get met. The CAS-WG would bring a rigorous approach to the duplications and any contradictions. My interest is in risk issues arising but this group would give a compliance expert good insights to the issues of complexity.


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