Can Asia Push Back the Tide of International Financial Regulations?
Asia is bracing for a slew of international financial regulations barreling toward it like back-to-back tropical cyclones. As many Asians know, cyclones can leave destructive and costly trails.
Not surprisingly, Asia is pushing back. A prime example: cross-border issues related to OTC derivatives reform. In August 2012, regulators from Hong Kong, Australia, and Singapore collectively raised concerns over the U.S. Commodity Futures Trading Commission’s (CFTC) extraterritorial rules on OTC derivatives.
Recently, Jin Liqun, chairman of the supervisory board of China Investment Corporation (the country’s sovereign wealth fund), said over-regulation and inappropriate market intervention are “major risks to the global recovery and threaten the efficient operation of the financial system,” AsianInvestor reported. He also mentioned the hypocrisy of those who “cling to economic theories of free markets,” but whose governments tighten control of the flow of capital. I think it is interesting that public figures in Asia are now taking the lead globally to push the regulatory debate forward.
There is a sense of disquiet in Asia over encroaching regulation, which has come about in reaction to the global financial crisis that started in the U.S. — just as the last massive financial reform initiative, the Sarbanes–Oxley Act, followed the collapse of Enron. Even a cursory glance at the long list of new regulations in asset management and banking coming out of the EU gives further cause for alarm.Regulators in Asia attending the third annual Thomson Reuters Pan-Asian Regulatory Summit in November 2012, which was co-sponsored by CFA Institute, raised the issue of regulatory arbitrage between Asia and the U.S. and Europe. Many agree that there is no “one size fits all” template.
When people ask “What does Asia think?” and “What is suitable for the Asian market?” the answers are diverse, reflecting various levels of development and priorities in the region. Unlike in the U.S. and the EU, there is no regional body here that oversees financial markets and enforces rules.
Creating Sensible Rules and Regulations
For a long time, Western governments have led global policy making. But Asia — now home to two of the world’s top five largest economies — cannot downplay its crucial role in building sensible rules and regulations, as well as enforcement actions that take into account the realities of emerging markets.
The stakes are high. First, the free flow of capital is Asia’s lifeblood. Any form of international capital controls, whether through increased bank capital requirements or taxes, hampers companies’ abilities to finance expansion and create jobs.
Second, more asset managers and investors globally are looking at opportunities in Asian markets because of low returns and low interest rates in developed economies. This poses challenges to Asian regulators in terms of investor protection and product authorization. At the same time, new global regulations could undermine important nascent financial activities in Asia, such as OTC derivatives trading, and could also set back the development of financial infrastructure through costly systems updates and protracted legislation to align local rules with international regulations.
Third, the dangers of overleverage that Basel III is trying to address, and systemic shocks that the Dodd-Frank Act is seeking to prevent, are real. Asia is not immune to them. If Asian governments think that by opting out of these regulations they can profit from businesses trying to skirt those rules in the U.S. and Europe, they might only be exposing the region to greater risks. Lower standards vis-à-vis Europe and the U.S. hurt Asia’s financial markets in the long run.
Balancing Risk and Reward
But how can Asian regulators adequately guard against risks without creating onerous rules? How can they protect markets without stifling growth? Western firms are busy trying to meet new regulations and rules and at the same time bridge gaps between those regulations and their Asian operations. Asian regulators can learn from these early adopters — when does it make sense for them to stand pat, and when is it better to yield? In the asset management area, the gathering demand for an Asian equivalent to the EU’s Undertakings for Collective Investment in Transferable Securities (UCITS) is evidence of the frustration that many local operators feel. An Asian UCITS would reduce cross-border operating costs, improve efficiency, and increase access to larger savings pools and, at the same time, offer investors more choices.
The answers to these questions will help define the way the financial industry in Asia will operate in the future and impact the region’s economic development. The future of finance in the next decade and beyond will, in large part, be made in Asia. All agree that Asian markets need better regulation, but is the emerging Western model the right one to follow? How Asian regulators answer this question will shape all of our futures.
Ultimately, it all boils down to trust. Government intervention can do some good, but equally important is the commitment from investment professionals to a fairer and more trustworthy financial system, which offsets the need for numerous rules.
Regulations set the game rules for financial markets, but only trusted relationships will encourage investors, firms, and governments to play. CFA Institute members are convinced that lack of ethical culture within financial firms most contributed to the lack of trust in the finance industry and that improving culture is needed to address the problem, according to the 2013 Global Market Sentiment Survey. Given the challenges in finding the right balance of regulation, now is the time to put that into action.
If you liked this post, consider subscribing to Market Integrity Insights.
Photo credit: ©iStockphoto.com/solvod