Press Releases

10 Priorities of Financial Regulatory Reform: Capco Identifies Factors Driving Volatility in the Capital Markets and Regulatory Issues that Congress Must Address

Contact
Diana Butler Buxton, (212) 284-8728; diana.buxton@capco.com

As regulatory reform of our nation’s financial system approaches its final stretch in the U.S. Congress, Capco is sharing its perspective on financial reform, the incidence of flash crashes and forces at work that continue to increase volatility in the financial markets.

Capco is a global provider of consulting and managed services dedicated solely to the financial services industry. Capco subject matter experts Michael Haworth (Capital Markets), Joe Anastasio (Capital Markets), Sandeep Vishnu (Finance, Risk & Compliance), Frank Liddy (Package Integration), Matt Cohn (Banking) and Alvi Abuaf (Wealth Management) are available to speak with journalists about factors that are contributing to market volatility and what priorities financial regulatory reform should address.

According to Capco, three major factors are contributing to market volatility:

  • Velocity -- Automated trading, multiple markets, and technology enhancements have driven market velocity to unprecedented levels;
  • Transparency -- Bundling and re-bundling have created a lack of transparency in the underlying asset base; and
  • Complexity -- Exotic instruments, higher-order derivatives, and other amalgamated products have created complexity and made it hard to separate components.

In addition, the system is de-leveraging. Placing larger constraints on leverage ratios may be one way to reduce trading velocity – which meaningful financial regulatory reform must address. Also…

“In light of the recent flash crash, regulators can help mitigate market volatility with an immediate focus on both volume and velocity,” said Capco Partner Michael Haworth. “While the ‘circuit breaker’ concept for individual stocks is a prudent first step, regulators and exchanges should consider enabling flow control of transactions based on the source of the trade. With nearly 80 percent of trades on the NYSE originating from automated, high-frequency trading systems, the ability to slow trading volume sourced from high-frequency trading platforms without denying access to market makers can go a long way towards minimizing volatility.”

Capco has identified 10 critical issues that Congress’ Financial Regulatory Reform should address.

Trade Flow
1. To manage trading anomalies and reduce the probability of a future “flash crash,” Congress and the Exchanges should think less about trading “circuit breakers” and more about enabling the means to throttle trade flow on individual equities up or down.

Compliance
2. Congress should encourage the financial industry to form a compliance clearing house. Similar to a check clearing house model, financial institutions should be incentivized to consolidate regulatory and compliance-related talent and technologies in order to accelerate adoption of new and existing regulations while enabling a consistent view of each institution.

Consumer Visibility
3. Clear visibility into the features and functions of consumer products. While it is important to mandate disclosure, consumers’ understanding of products and markets is critical.

4. Institutions should be able to set prices as they see fit, but not change lending terms mid-stream (e.g., increase interest rates substantially after a single missed payment).

Risk Control & Transparency
5. Adequate controls and understanding of risk around private equity investments and proprietary trading are necessary. Elimination of such investments has the potential to stifle innovation, create legal jeopardy for past behavior, and further erode consumer confidence in markets and regulators.

6. Increasing transparency through incremental measures that can determine the point of diminishing marginal return. Buyers and sellers need to make informed decisions on standard and non-standard products, which can only be achieved if adequate information is provided in a portable and persistent manner.

Orderly Liquidity & Reporting
7. Untenable positions need to be unwound or liquidated in an orderly manner to preserve the currently fragile confidence in markets -- incremental options will help the financial services industry avoid a “tipping point.”

8. Temptation to add more regulations and more laws should be resisted to avoid greater confusion, rather than clarify. Better and more complete reporting can be adequately mandated by current regulators and current laws.

Executive Compensation
9. To improve confidence, executive compensation can be structured against longer time horizons and future performance.

Global Regulatory Consistency
10. Strong cross-border coordination of regulatory reform is important. As the crisis demonstrated, it is important for institutions to have “living wills” so that in the event of future crises there can be an orderly response to mitigate systemic risk.

According to Capco, markets, investors and regulators need to develop a better appreciation of linkage and dependency across global markets to avoid systemic risk. Silos by product, market, region, or country fail to account for domino effects and leave little room for managing complexity.

About Capco
Capco is a leading global provider of integrated consulting, technology and transformation services dedicated to the financial services industry. Our professionals combine innovative thinking with our unrivalled first-hand industry knowledge to offer our clients consulting expertise, complex technology and package integration, and managed services to move their organisations forward. Through our collaborative and efficient approach, we help our clients successfully increase revenue, manage risk and regulatory change, reduce costs and enhance control. We specialise in banking; capital markets; wealth and investment management; finance, risk & compliance; and technology. We serve our clients from offices in leading financial centres across North America and Europe. To learn more, visit our web site at www.capco.com.

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