G20 Pittsburgh: two days to get it right
Decisions in Pittsburgh to determine the shape of Macro Prudential Oversight (MPO) plan
London - 23 September 2009 The UK took the helm of the G20 Leaders Summit earlier this year in the biggest test of political will the modern economy has seen. Members were able to agree on a broad-ranging action plan to restore market confidence, jobs and economic growth. Though the economy is not yet out of the woods, it has recovered sufficiently for the world’s leaders to get serious at the next G20 Leaders Summit - which starts tomorrow in Pittsburgh - about how they will implement measures that will keep the markets safe in the future.
PJ Di Giammarino, CEO of JWG, comments: “Whilst popular positioning about bonuses and taxes will appeal to the electorate, the financial community will focus on the extent to which the 92-point action plan, set out in April 2009, is serious about monitoring the levels of risk in the markets. The G20 propose a degree of detail to control financial risk never before seen at an inter-governmental level. This means that technocrats and regulators have some big decisions to make if they want to be able to do the job that politicians are promising to the angered general public.
Di Giammarino emphasises that there are many opportunities to get this wrong. Experiences show that the 4 Ps of regulatory failure are due to:
- Politics - Regulatory arbitrage opportunities for front running, i.e., if EU hedge fund restrictions and UK liquid asset buffers are established two years before the US, how will global businesses react?
- Policy failures - Bad, or impractical, rule making and working without impact assessment causes firms to rethink their business models, i.e., they use their capital to best effect there could be unforeseen consequences
- People - The buck just stops and no implementation accountability is assigned. In addition, the wrong people are empowered while the right ones are not engaged
- Planning - Unrealistic timeframes are set and de facto solutions are put in place by front runners without proper standards.
Di Giammarino continues "Better MPO – the stated aim of the G20 – means getting the right information, at the right time, to the right people, such that those people can make the most informed judgments possible. The simple fact is that the infrastructure of the financial world was never intended to cope with a requirement of this scale."
Over the next two days JWG will be looking out for, and commenting on, the 5 Rs of good regulatory implementation planning:
- Rules - Will the new ‘macro’ rules allow for separate pillars of risk management? Equal market, credit and liquidity risks, when assessed individually and aggregated, may indicate a once-per-millennium occurrence, but if they are all facets of the same scenario, they could be seen once a decade.Comprehensive requirements, like stress testing, require actionable targets and meaningful guidance.
- Referees - Which regulatory system will win? Will an outcomes-based approach, which requires proof of judgment, be adopted by the US? Will Europe empower their central regulatory functions? Will Asia engage as a region? What tools will enable global regulatory cooperation? What will the penalties be for non-compliance in the form of bad data, late reports or inadequate systems and controls?
- Race courses - What new trading infrastructure will be mandated for OTC instruments? What transparency of currently opaque markets is required? Who will own the colossal counterparty and instrument databases required for macro prudential oversight? How will the information be shared with the marketplace? What standards will be mandated?
- Readiness - How much higher will the bar for a bank’s infrastructure be raised? How will it change the way they need to engage with the market and report to the regulator?
- Rankings - Will the new landscape provide a competitive advantage to some business models at the expense of others?
Di Giammarino concludes “Pittsburgh rare” is a delicacy that originated when steel workers made lunch by slapping raw meat on hot metal – resulting in steak that was burnt on the outside and raw at the core. The G20 cannot afford this type of approach. To get this right, an adult set of conversations is needed about the realistic requirements of the financial markets, what the impact of change will be and the practical steps required. One year on from the crisis, we hope for an elaboration of the G20’s implementation plan that realises the aspirations for international collaboration established in London."
About JWG Group Limited
JWG seeks to be recognised by regulators, financial institutions and technology firms as the independent analysts of choice to help them determine how the right regulations can be implemented in the right way. Founded in 2006 to initially work on MiFID, JWG launched the customer data management group and the liquidity risk action network in 2008. For more information, see www.jwg-it.eu
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PJ Di Giammarino,firstname.lastname@example.org, +44 (0) 7811 430 503
Louisa Excell, Louisa.email@example.com