Regulating the Global Financial Industry

The Commodity Futures Trading Commission, the not very transparent 5-person committee of Republicans and Democrats charged with regulating the US derivatives industry, is reportedly split over the question of regulating overseas trading by US-based financial institutions.

The New York Times reports concern by commissioners that too much regulation in the US could encourage financial institutions to operate elsewhere.

The report raises several issues. The first is the question of "regulatory arbitrage". It seems insane that in a world of global finance there is still only local regulation. Obviously banks and other financial institutions will want to go where the regulation is most lenient; governments do not want their countries to lose business to other financial centers, especially when all are fighting to reduce public debt and deficits (and competing with each other for anything that can bring economic growth).

The second issue is a governance issue. The Commission operates very much behind closed doors, and there appears to be a lack of clarity on what the ultimate goal is. I believe that a regulatory body should focus only on safeguarding consumers from risk (and clearly this is the mandate, based on Lehman, J.P. Morgan etc.), not on competitiveness of the industry versus London or Hong Kong.

Another issue has to do with the scope of the regulations. How can only certain kinds of institutions be included and not others? What about hedge funds? How can you even regulate these things in a world where any average Joe can go online and invest in some formula unrelated to anything concrete (a future on a hypothetical event with a hedging factor based on something else packaged and resliced, with an algorithm based on a graph hitting a ceiling or a floor) located not really anywhere (somewhere in the 'cloud')?

Perhaps the G20 or other transnational forum should begin a serious discussion of all this, so fundamental to the future of our children.