value, financial innovation and regulation - an unholy trinity? · 2015. 4. 6. · innovation and...
TRANSCRIPT
Value, Financial Innovation and Regulation - an Unholy Trinity?
Jeremy Josse
March 2015
2
The views expressed in the following material are the
author’s and do not necessarily represent the views of
the Global Association of Risk Professionals (GARP),
its Membership or its Management.
VALUE
Could there really be value in a contract /
option to buy a Megalodon?• Brokers – generation of demand
• Control of supply
• Liquidity
• Arbitrage
• Habit
Gold
Diamonds
The $ bill
Contracts for Differences
Internet / social media stocks
Market value ‘v’ intrinsic value
Technical analysis ‘v’ fundamental analysis
The ‘efficient market hypothesis’
Behavioral finance
Shleifer, Shiller
Quantifying ‘irrationality’
Mispricing• CDOs/CLOs
• CDS
Complexity / lack of transparency
The nature of financial innovation
FINANCIAL INNOVATION
Rights
Contractual strings / permutations
“Epicycles upon epicycles”
“Legal fictions”
Loans
Stocks
Convertibles
Derivatives
Securitizations
CDS
Empirical testing – cf. a drug or a car
Deductive inference – cf. mathematics
No “social laboratory”
Macro-economic policy ‘v’ private financial
innovation
Financial innovation is• Critical, but
• Vulnerable
New innovation• CDOs/CLOs and CDS
Untested – hence … mispricing
One of the causes of the crisis• The nature of financial innovation itself
REGULATION
1970s
Emergence of a new asset class
Irregular patterns of behavior
Wild price movements
Now an established art form
Dysfunctional patterns of behavior
Value fluctuations – greed…
Distributive justice
Bubbles
Financial innovation
“The rule of law to the rule of lawyers…”
100 years of regulation
Micro-managing rules
Dodd Frank
“Living wills’
Regulatory failure
1930 1940 1950 1960 1970 1980 1990 2000 2010 Present
1931: Uniform Sale of
Securities Act
1932: Reconstruction
Finance Corporation Act
1933: Securities Act of
1933
1933: NYSE Requires
Audited Financial
Statements
1933: Glass-Steagall Act
1934: Securities
Exchange Act of 1934
1937: SEC Accounting
Series Release
1933: Maloney Act
1939: Trust Indenture Act
1939: NASD Created
1940: Investment
Company Act and
Investment Advisers Act
1940: NYSE Multiple
Trading Rule
1942: Rule 10b-5
Adopted
1944: Delaware
Limitations on
Shareholder Actions
1945: SEC Limits
Application of Accounting
Standard for Taxes
1946: Administrative
Procedure Act
1946: NASD Registration
of Broker Representatives
1947: Hoover
Commission Report
1951: Arizona Securities
Act
1951: Loss on Securities
Regulation
1953: Private Offering
Exemption
1953: First GAAP
Codification
1954: Proxy Rule
Amendments
1956: Uniform Securities
Act
1957: NYSE Rule 394
1957: Pooling-of-Interests
Accounting Sanctioned
1958: Deferred Taxes
Ruling
1963: Investment Tax
Credit Accounting
1964: Securities Act
Amendments
1964: “Come to Rest”
Abroad Offerings
1968: Williams Act
1970: Securities Investor
Protection Act
1973: International
Accounting Standards
Committee Formed
1974: Commodity Futures
Trading Commission
1974: Safe Harbor Rules
1974: ERISA
1975: Fixed Commissions
Eliminated
1975: Securities Act
Amendments
1975: Municipal
Securities Rulemaking
Board
1975: Voluntary
Disclosure Program
1976: Materiality Defined,
Sunshine Act
1977: Foreign Corrupt
Practices Act
1977: FASB Voting
1978: Rule G-15
1979: Specialized
Industry Accounting
1981: Central
Registration Depository
1982: Regulation D
1982: Futures Trading
Act
1982: Garn-St. Germain
Depository Institutions Act
1982: Shelf Registration
1984: Insider Trading
Sanctions Act
1985: Revised Uniform
Securities Act
1985: Poison Pill
1986: Tax Reform Act
1987: NASAA Model
Uniform Rules
1988: Rule 19c-4
1988: State Exemption
for Nasdaq Trading
1989: Rule 15c2-12
Regulates Municipal
Underwriters
1989: FIRREA
1990: Market Reform Act
1990: Regulation S
1990: Safe Harbor for
Resales
1990: Securities
Enforcement and Penny
Stock Reform Act
1992: Proxy Changes
1993: Investor Protection
Trust
1994: Uniform Voting
Standard
1995: Creation of SEC
Office of Municipal
Finance
1995: Private Securities
Litigation Reform Act
1996: National Securities
Market Improvement Act
1996: Rule G-38
1996: Nasdaq and NASD
Regulation
1997: Independence
Standards Board
1998: Plain English Rules
1998: Regulation ATS
1999: Gramm-Leach-
Bliley Act
2000: Regulation FD
2000: Commodity Futures
Modernization Act
2001: FASB Ends
Pooling-of-Interests
Accounting
2002: Sarbanes-Oxley
Act
2002:New Uniform
Securities Act
2002: Public Company
Accounting Oversight
Board
2003: NYSE Corporate
Governance Standards
2004: Net Capitalization
Rule Exemption
2005: Reform of Offering
Process
2005: Regulation NMS
2005: Ban on Municipal
Securities Dealer Use of
Consultants
2006: Credit Rating
Agency Reform Act
2006: 529 Plans
2006: Fair Value
Measurements
2006: FINRA
2009: Credit Card
Company Restrictions
2009: FASB GAAP
Codification
2010: Dodd-Frank Act
2010: Consumer
Financial Protection
Bureau
2010: Financial Stability
Oversight Council
2012: JOBS Act
Regulatory Exemption
2012: STOCK Act
2013: Volcker Rule
2013: Dark Pools
Disclosure
….and the story
continues…
Back Office
Crisis, Auditors
Under Siege
Nasdaq and
CBOE open
Y2K, Boiler
Room Scams.
WorldCom
Fraud, Enron
Scandal, Madoff
Scandal, Great
recession
Flash Crash
1968: Management's
Discussion and Analysis
Some major
events
Principles
Clarification of rules solely by judges
UK Takeover Code
Vexatious litigation
Form filling
CONCLUSIONS
Regulation
ValueFinancial
Innovation$