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As derivatives dervishes gather in London for the annual IDX festivities, there are significant storm clouds on the horizon. Yet they look likely to be, at best a side topic, notes our columnist, Patrick L Young.
Make no mistake this is a derivatives world.
However, make no mistake either, this ought to be inevitable but cannot be taken for granted.
The derivatives industry has suffered execrable PR for many years now. This has been largely driven by the combined forces of banks which were deploying the risk management strategy you’d expect from footballers’ wives facing a string of designer boutiques, along with complete practitioner incoherence coherently endorsing the positives. Thus the battle in the public eye has been almost lost. Meanwhile the industry continues to score remarkable own goals. On the retail plane FXCM and Plus500 could apparently have benefited from even some footballers’ wife management consultancy, while in wholesale markets the banks created massively complex beasts favouring one client and sold them to people on fixed salary scales in local government…
There needs to be coherence in messaging and understanding, as opposed to an ongoing obsession with lobbying to the blob in gobbledygook.
Rarely, in any era, have we seen such a massive amount of pointlessly unproductive regulatory hyperactivity as in the current age. The frenetic activity perfectly demonstrates Ronald Reagan’s famous mantra of the most dangerous sentence in the English language: “I’m from the government and I’m here to help.” Markets are currently implementing the EU’s ‘great waste of time directive’, or ‘MiFID II’ as it’s known in the trade. Like so many ill-conceived bloated movie sequels, made while the producers had the heady acclaim of their original blockbuster swelling their egos, MiFID II is a chiller, offering no broad benefit to anybody – except the compliance profession.
On that theme, the UK Institute of Economic Affairs notes that in 1980 there was one regulator for every 11,000 UK financial sector employees. In 2011 there was one for every 300 employees. This growth curve will give every financial employee more than one regulator each by 2070.
That’s Communism, folks!
If regulation made anything better that would be a great thing. However, an observer of the exchange universe right now will see a much less capable regulatory system than the truly light touch era from before 1980. Call me old fashioned, but I believe that market platforms which are allowed to make false markets, are not merely against investors’ best interests but are something regulators ought to, well, regulate. Instead, there appears to be an odd aversion to the encouragement of competition. In the breach regulators encouraging competition is akin to the concept of killing an admiral “pour encourager les autres” - the fate of Admiral Byng after the aborted relief of Minorca in 1756. Nowadays anyone failing the UK taxpayer will receive at worst, a lavish pension and more often than not, promotion. Banks merely copied the civil servants’ playbook when creating ‘too big to fail’.
Things are not going much better in the US. Deploying lavish hyperbole creates prominent scapegoats to catch the public eye but does little to promote justice. Thus the ‘Hound of Hounslow’, a footnote Fagin pickpocket scalper who ought to have been long ago shut down by CME, has been elevated to a criminal mastermind of the type normally found in a leather armchair stroking longhaired pussies while battling James Bond.
So, clearly market supervision of venues leaves a lot to be desired, while banks use self-disclosure to feed headline fines meted out by regulators. (In other words, when venues don’t admit their dubious market rigging, clearly we can presume the regulators are unable to find it themselves?).
Organised markets have a huge perception problem right now. This is odd, as the greatest potential for exchanges is precisely now in this digital age. Yet markets seem somewhat ineffective in regulating themselves and regulators are entirely incapable of creating fair, reasonable markets, while they frequently seek to cover their tracks with judicial attacks on what are, in relative terms, ‘straw men’.
All the while, the good folk of Main Street remain convinced the marketplace is rigged against them (with, it has to be said, some decent evidence).
This is not a good starting point for any conference. However brushing the reality under the carpet isn’t going to help. We need a reset, not more alcohol from the burgeoning drinks cabinets in the exhibition hall.
Patrick L Young will chair his next’ ‘Future of Finance’ conference ‘Young Markets’ in Warsaw, September 17th.
