Sibos 2008 in Vienna — 15-19 September 2008

Reforming financial markets: Are intervention and innovation uneasy bedfellows?

> Tuesday 16 September - 16:00-17:00

Friedrich Hayek, the Nobel prize-winning Austrian economist known for his views on free market capitalism and criticism of central control, once said " The more the state plans, the more difficult planning becomes for the individual". Historically, intervention has tended to be a response to a market failure. More recently, however, central authorities - particularly in Europe - have taken a more proactive stance through regulations like MiFID and market utilities such as T2S. This raises questions: Does intervention stifle or promote innovative market development? How do free markets strike a balance between intervention and innovation? Will the credit crunch lead to a period of increased intervention? Is intervention incompatible with a free market?

A panel of experts will debate these issues and more under the motion: "This House believes that except in the case of a market failure, central authority intervention has no place in the development of efficient and effective capital markets".

Vienna, Tuesday 16 September 2008

Interventionism wins the day

Short-term market participants need long-term structural intervention.

The continuing market turbulence and the unwillingness of the US Treasury to step in and save Lehman Brothers made Tuesday evening’s session, – ‘Reforming financial markets: Intervention and innovation: uneasy bedfellows?’ – even more topical for Sibos delegates.

“Central authority, is not so much about putting in hardline regulatory power, it’s about a discussion with the market.” Jochen Metzger, Bundesbank

A lively Oxford-style debate posed the motion: “Except in the case of market failure, central authority intervention has no place in the development of efficient and effective capital markets.” A poll of the audience showed that before the session began the majority of delegates agreed with the motion.

Arguing in favour of the motion, Dermot Turing, a partner at Clifford Chance, said, “It’s not about opposing market intervention altogether, rather recognising when it is appropriate for a central authority to intervene,” he said.
“We say this is only suitable when there is demonstrably market failure.”

Unforeseen consequences
He cited cases of bank insolvency in the UK over the years and how central authority intervention led to legislation, which had the aim of making sure a
repeat of the episode did not occur. “In each case there was a clear market failure and a legislative response that was proportionate,” he said. “Regulation is often the right thing to do but you need to evaluate whether intervention will help things or introduce new problems, which weren’t foreseen.”

Taking this assertion forward, Markus Ruetimann, group COO of Schroders, gave ten examples of where central intervention had failed or hindered market participants, highlighting the complexity of the Financial Services and Markets Act in the UK and the IOSCO report on securities processing. The former, he said, was so convoluted that regulatory organisations required firms that were deemed to be in contravention of the Act to seek legal guidance.

“The willingness for change must only come from market participants, who profit from each others’ inefficiencies,” he said. To illustrate this, he pointed to Turquoise, the pan-European equities trading venue, set up by nine investment banks, with the aim of challenging the monopolies of the incumbent exchanges.

Governing interdependence
However, Marianne Brown CEO of Omgeo, arguing against the motion, was quick to point out that the challenge to the exchanges hegemony was only made possible by MiFID. She saw a key role for central authorities in “preventing the many forms of misalignment” and argued that a lack of intervention could leave the market more vulnerable to crisis.

“The willingness for change must only come from market participants, who profit from each others inefficiencies.” Markus Ruetimann, Schroders

“Our marketplace is made up of a community of participants, who have individual aspirations that are unique to the market they serve,” she said. As global markets become smaller, she argued, interdependence is key and needs to be governed.

Another key misalignment she noted was between the short-term goals of
market participants, compared to the long-term structural changes that central authorities need to make to enable more efficient investment.

Furthermore, she viewed intervention that comes only in the time of a market failure as leading to misguided and heavy-handed solutions. “Authorities have no choice but to act quickly to manage the symptoms of the crisis and restore order to the market without creating a moral hazard,” she said. “This also does not allow for constructive dialogue and collaboration with market participants, who are the only ones who can identify the weak links in the system.”

Jochen Metzger, Director and Head of Department, Payments and Settlement Systems at the Bundesbank, supported Brown’s view. “Central authority, is not so much about putting in hard-line regulatory power, it’s about a discussion with the market. This is characterised by the CPSS and Financial Stability Forum, which are taking this approach in order to achieve harmonisation in global settlement standards,” he said. “This is a coordination problem and a constructive cooperation with the market is the right approach.”

The argument seemed to have won over the crowd, who voted overwhelmingly for central authority intervention in the capital markets at the session close.