How does the European market structure compare to other regions? How do you see Europe developing in the future and what will be the main drivers for those changes?
Well, when we compare market structure regulations we are really comparing Europe and US, that have been the areas where authorities have been more active in introducing new rules. In Europe Mifid 2 will lead to profound market structure changes with the same goal as that of Dodd- Frank and the creation of SEFs that is to reduce systemic risk and increase transparency in the OTC derivatives market .
European markets will certainly be the most regulated markets in the world. So we are more regulated than in US and Mifid II will certainly broaden this gap.
In general, both US and Europe come from a prolonged period of “re-regulation”. When I graduated in college I wrote a thesis on the “deregulation in the USA” which led to the junk bonds scandal and the consequent defaults of hundreds of savings and loan associations. So, it is a fact that deregulation and re-regulation are cycles in the financial industry and finding the right balance is not easy.
The problem is that the history of financial crisis tells us that mistakes are made during the boom, not during the crash. So both regulations and monetary policies works much better if implemented during the boom, not during the panic. As it is never a good advice to plan your future during a panic attack, in the same way it is never a good practise to introduce long-term rules during financial crisis.
And this is where Europe and US usually differ more. In Europe, we have a tendency to be over-regulated because the regulatory framework tend to be led more during years of financial crisis. Conversation become soon very political, like the discussion about transparency during the negotiation process in Mifid II. Rules are introduced imagining always a worst case scenario as emergencies measures and therefore tend to be ineffective when the emergency is over.
In the U.S. the approach is somewhat different, reflecting perhaps Americans’ greater belief in markets and their stronger mistrust of regulation. The emphasis across the Atlantic has always been on finding business-friendly ways to regulate financial markets and avoid more bank failures.
All the regulatory and policy debates in the U.S. are less about modifying capital requirements and more about how to ensure that private investors rather than tax payers will pay the cost of a crash, holding that “contingent capital” which in a crash can be converted into equity.
Last but not least, the negotiation process of a new regulation is different between Europe and US. In US there is a long tradition of regulators and industry representative sitting at the same table when discussing the introduction of new rules, with the objective of understanding in advance potential negative unintended consequence s of the cats they intend to pass. I think we have less of this tradition in Europe, although it has improved significantly over the last few years as it is proven by the many consultation process that now European authorities have promoted with industry representative.
In the todays’ world, over-regulating can be a significant risk. Global companies will always look for good places where to do business, with a good mix of talent pool, tax system, regulation and bureaucracy. When jurisdictions and regulations become an arbitrage opportunity, then you put your area at risk of losing business.
