Financial Regulations

(compiled based on different sources

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 Contents
• Needs for supervision of financial institutions and markets
• What do we mean by Financial Regulation?
• Banking Regulations in Saudi Arabia
• Present Supervisory Structure-UK perspectives
• Regulatory Processes
• US regulatory and supervisory practices
• US & EU Institutional regulatory settings
• Financial Stability Oversight Council
• Global reform agenda – macro-prudential supervision
• Contract or Regulation?

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 Supervision of Financial Institutions and
Markets
Financial institutions
• Credit institutions (banks, building societies and credit
unions)
• Insurance undertakings (Life, Non-life and Friendly
Societies)
• Investment firms (Securities and Derivatives
broker/dealers, asset managers
• Mortgage lenders and brokers
• Collective investment schemes and managers
• Operators of multilateral trading facilities
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 Supervision of Financial Markets

• Recognised investment exchanges

• Recognised clearing houses

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 What do we mean by Financial Regulation?
• Macro-prudential regulation – regulation of stability and
resilience of financial system
• Micro-prudential regulation – firm-specific regulation of
safety and soundness
• Regulation of firms’ conduct of business
• Regulation of markets (including Listing Rules)
• Regulation to combat financial crime and market abuse

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 Banking Regulation in Saudi Arabia
• Under the Banking Control Law (“BCL”), no person or
entity is allowed to carry on “Banking Business” within
Saudi Arabia without being licensed in accordance with the
BCL. “Banking Business” is widely defined in the BCL to
mean the business of “receiving money on current or fixed
deposit accounts, opening current accounts, opening of
letters of credit, issuance of letters of guarantee, payment
and collection of cheques, payment orders, promissory
notes and other similar papers of value, discounting of
bills, bills of exchange and other commercial papers,
foreign exchange transactions and other banking business.”
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 Banking Regulation in Saudi Arabia
• The licencing of a foreign bank to carry on banking business involves an
application to the Central bank of Saudi Arabia, Saudi Arabian Monetary
Authority (“SAMA”), which submits its recommendations to the Minister of
Finance, who issues such licenses. Following the Minister of Finance’s
recommendation, licenses granted to a foreign bank are further subject to any
bank finance and other conditions stipulated by the Council of Ministers.

• It is noteworthy that, in recent years, the number of branches of foreign banks

licensed to carry on business in the Kingdom of Saudi Arabia has increased,
with, for example, both Standard Chartered Bank and Credit Suisse receiving
licences. This illustrates both the increasing attractiveness of the Saudi market
to foreign banks and the desire of the government to increase the pool of
financing options open to borrowers in the market.

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 Financial Regulations in Saudi Arabia

• Oversight of the financial regulation in the

Kingdom of Saudi Arabia is divided between
the Saudi Arabian Central Bank (“SAMA”)
now name as Central bank of Saudi Arabia, for
banks, insurance companies, payment service
providers and finance companies and the
Capital Market Authority (“CMA”) for
securities business and the Saudi capital
markets.
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 Financial Regulations Developments In Saudi
Arabia
• SAMA and the CMA, respectively, are constantly
developing regulations to ensure a business environment
that fosters both investor confidence and prudent risk
management by regulated entities and that encourages
economic growth and innovation. One of the 12 executive
programs consolidated from Vision 2030 is the Financial
Sector Development Program, whose goal is to diversify
the financial sector and to make it more efficient in order
to enable financial institutions to support the growth of the
private sector.

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 Present Supervisory Structure in UK

• Bank of England - statutory responsibility for financial

stability
• Financial Services Authority( FSA)-statutory
responsibility for prudential supervision and conduct of
business regulation of all authorised financial
institutions
• FSA also responsible for exchanges , clearing houses ,
official listing and financial crime

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 Regulatory Processes

•Authorisation and Permission

•Removal of Permission and Authorisation
•Approved Persons
•Approval of Controllers
•Passporting
•Rule-Making and waiver of rules
•Supervision of Financial Groups
•Insolvency

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 The Effectiveness of UK-style ‘light-touch’
Principles-based Regulation?
• ‘The United Kingdom’s experiment in a strategy of
light touch regulation to attract business to London.
away from New York and Frankfurt ended tragically.
That should be a cautionary note for other countries
deciding whether to try to take advantage of the rise
in standards in the United States’
Timothy Geithner, US Secretary of the Treasury, 6 June 2011

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 US regulatory and supervisory practices were
suspect as well
• In 2003, then-Vice Chairman of the Federal Reserve Roger W.
Ferguson praised
the truly impressive improvement in methods of risk
measurement and management and the growing adoption of
these technologies by mostly large banks and other financial
intermediaries.’
(The Future of Financial Services - Revisited, 8 Oct 2003)

• Alan Greenspan believed in ‘self-regulation.’

It is critically important to recognize that no market is ever
truly unregulated, . . The self-interest of market participants
generates private market regulation. Thus, the real question is
not whether a market should be regulated. Rather, the real
question is whether government intervention strengthens or
weakens private regulation.’
‘Government Regulation and Derivative Contracts’ (Feb 1997) 15
 US & EU Institutional regulatory settings
In Europe
In the US
European Central Bank WGMA
Federal Deposit Insurance Corporation Banking Stability Committee
WGBD
Level 3 Committees :
 CEBS (Committee of European Banking Supervisors)
Federal Reserve  CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors)
Banks
Office of the Comptroller of the Currency  CESR (Committee of european Securities Regulators
27 EU National Central Banks
and/or EU National Supervisors
Thrift Office of Thrift Supervision and/or banks, insurance, securities

Insurance Bank of International Settlement

States
Basel Committee - BCBS (Basel Committee of Banking Supervision)
Securities SEC CGFS (Committee of Global Financial System)
CPSS (Committee on Payment and Settlement Systems)

Worldwide
FSB
On vulnerabilities assessment
On supervision and regulatory corporation
On standards implementation

IMF
Joint Forum
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 Supervisory Structure – the US experience

• Multiple regulators justified as creating ‚checks and balances‘ to

keep agencies ‚from becoming arbitrary or inflexible‘.
• The current structure provides banks with a method . . . of
shifting their regulator, an effective test that provides a limit on
the arbitrary position or excessively rigid posture of any one
regulator. The pressure of a potential loss of institutions has
inhibited excessive regulation and acted as a countervailing force
to the bias of a regulatory agency to overregulate. - Alan
Greenspan (1994)
• Some US regulators (OTS and OCC) were funded by industry
assessments from institutions they regulated. As a result, the
larger the number of institutions that chose these regulators, the
greater their budget
 US ‘Fed Lite’ Programme (1999)

• Light-touch regulation and supervision of Financial Holding

Companies
• Intent was to eliminate excessive or duplicative regulation
across a FHC’s subsidiaries and across financial sectors
• However, Fed Lite ‘made it difficult for any single regulator to
reliably see whole picture of activities and risks of large,
complex banking institutions.’ Ben Bernanke, evidence before
the FCIC
• Complex regulatory and institutional structure made it
difficult for anyone regulator, including the Fed, to identify
excessive risks and unsound practices building up in non-bank
subsidiaries of financial holding companies, such as Citigroup
and Wachovia.
• US has a fragmented structure for financial regulation and supervision
• There was an absence of a governing body to oversee the various agencies
• Vulnerability to gaps and oversight failures
• Dodd-Frank creates ‘Financial Stability Oversight Council’ (the Council) to
oversee financial institutions
• The Council: chaired by Treasury Secretary. Voting members consist of
heads of Treasury, Federal Reserve, OCC (Comptroller), SEC, CFTC
(futures), FDIC (Deposit Insurance), Federal Housing Finance Admin,
National Credit Union Association, & Bureau of Consumer Financial
Protection, and an independent member with insurance expertise
appointed by president. Non-voting members: Office of Financial
Research, Director of Federal Insurance Office, a state insurance
commissioner and state securities commissioner
• Purpose: identify and respond to risks to US financial stability arising from
large interconnected financial institutions and outside financial sector
• Collect information, direct financial research, monitor regulatory
proposals, facilitate info sharing among federal and state agencies
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 Dodd-Frank Act - Major changes in agency
oversight (Title III)
• Fed will regulate thrift holding companies & subsidiaries.
Continue to regulate state member banks
• OCC will regulate national banks and federal thrifts of all sizes
• FDIC will regulate state thrifts of all sizes
• OTS eliminated and functions shifted to Fed, OCC or FDIC
• SEC require registration of investment advisers who manage
over $100 million of hedge funds
• Create Office of National Insurance (in Treasury)
• Create Office of Credit Rating agencies
• Bureau of Consumer Financial Protection (in Fed)
 Financial Stability Oversight Council

• 15 members – Membership – FRB, FDIC, Treasury, SEC, OCC, CFTC, & FHFA
• Identify gaps in regulation and provide a forum for discussion of cross cutting
issues
• Coordinate macro-prudential systemic views of other regulators
– Identify institutions’ practices and markets that create potential systemic risks
– Synthesize perspectives of various functional regulators
• Federal Reserve Board – main systemic risk regulator of financial institutions
(Financial Holding Companies) with excess of $50 billion assets.
– Authority to recommend firms that will be subject to Tier 1 FHC supervision
– Systemic regulator (FRB) required to consult with the council in setting prudential
standards for Tier 1 FHCs.
• Issues:
– Agencies serve as check and balance to systemic regulator?
– How agencies discharge responsibilities in globalised financial markets and adequately
coordinate with other national/EU authorities?
 Global reform agenda –
macro-prudential supervision

• Global consensus on need for more effective, better

coordinated macro- and micro-prudential regulation and
supervision
• Oversight of systemic risk has to be globally co-ordinated
• Systemic risk oversight bodies: international, regional,
national
– Global: Financial Stability Board (FSB)
– EU: European Systemic Risk Board (ESRB)
– UK: Financial Policy Committee of Bank of England
– USA: Federal Stability Oversight Council
– Switzerland: systemic risk oversight committee (FINMA and Swiss
National Bank)
– France: Council on Financial Regulation and Systemic Risk

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 G20 and Financial Stability Board Initiatives

 The G20 Washington Action Plan and the London & Pittsburgh
Summit Statements on strengthening the financial system
 FSF’s April 2008 and 2009 Reports
 FSB principles for cross-border cooperation on crisis
management
 G-20/FSB protocol to establish colleges for all major cross-
border financial institution
 Basel Committee membership increased to 20 (Australia,
Brazil, China, India, Korea, Mexico and Russia)
 Macro prudential to complement micro prudential
regulation
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 The Financial Stability Board: in brief
• FSB (global systemic risk)
• FSB – G20 mandate to promote global financial stability
• Members: developed countries and large developing countries
– national financial authorities (central banks, regulatory and supervisory authorities and
ministries of finance) international financial institutions
– standard-setting bodies
– committees of central bank experts
• FSB mandate includes
– Assessing vulnerabilities, and identifying and overseeing action needed to address them;
– Collaborating with the IMF to conduct early warning exercises
• FSB soft institutional structure and no binding powers
• Flexibility/speed evident in response to crisis in 2009
• Impact?
– Obligations on members
– FSB members produce almost 90% of world GDP: leading by example
– Peer reviews
– Implementation & follow up
– Transparency
– “Naming and shaming”
• Accountability and legitimacy concerns?
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European System of Financial Supervision
European Systemic Risk Board (ESRB)
[Chair elected by ESRB Board]

Members of
Macro-prudential ECB/ESCB Chairs of European
supervision General Council + EBA, EIOPA + Commission
(with alternatives & ESMA
where necessary

Information on micro-prudential
development Early risk warning

European Supervisory Authorities (ESAs)

European European
Micro-prudential European Banking Insurance Securities &
supervision Authority Occupational Markets Authority
(EBA) Pension Authority (ESMA)
(EIOPA)

National National National

Banking Insurance Securities
Supervisors Supervisors Supervisors
 What role for international law?

• Financial globalisation requires international standards/rules

- how voluntary?
• What international legal relevance?
• The governance gap in international norm setting and the
challenge for efficient international financial regulation – the
dominance of the G10/G20?
• What supervisory structure for global governance
• International norms must be effective, accountable and
legitimate
K. Alexander et al., Global Governance of Financial Systems (OUP, 2006)

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Competition Policy and Prudential Regulation

> Competition policy not part of the tool kit to ensure stability of the financial
regulation
> Complex inter-relationship between competition policy and prudential
regulation
> Competition and stability not mutually exclusive
> Competition in financial markets is important . . .
> . . .but if prudential regulation gets it wrong, then competition makes
matters worse
> Law of unintended consequences: hospital pass for ICB
> Priorities are important
> Fix prudential regulation first
> Then deal with competition issues
Contract or Regulation? The Risk of Blind
Spots in OTC Derivatives Market Reforms

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The Issue
A transnational private regulatory regime has been prevalent in
OTC derivatives markets since the 1980’s
International Swaps and Derivatives Association (ISDA) has
issued boilerplate contracts enforceable in particular courts
(NY, London)
SWAPS Code, Master Agreements 1987, 1992 and 2002
Credit support annex, definitions etc
Question is whether this regime can be conceptualised as a
purely self contained private contract based regime?
Could there be normative and practical regulatory ‘blind spots’,
especially in light of recent reform proposals in the US and EU?
Derivatives – What are they?
Have probably been used since at least 2000 B.C.
Are ‘bets’ on stock, commodities, weather etc
without physically owning the underlying
Counterparties agree to pay or receive currency,
dependant on whether or not some extrinsic,
uncertain event occurs in future (Lynch 2011)
Hedging theoretically beneficial in risk allocation
Speculator with speculator trading more
problematic. Zero sum or negative sum game. On
average speculators will lose (Lewis 2010)
May be considered analogous to traditional forms
of gambling (Stout 1993-2011, Lynch 2011, Hazen
2005)
Exchange traded and ‘over the counter’ (OTC)
2000-2008 – What Happened?
After years of uncertainty lobbying (e.g. G30) and the
‘Greenspan doctrine’ heralded CFMA 2000, exempted OTC
derivatives from regulation in the US while also rendered
court enforceable. Old common law rule superseded
UK FSMA 2000 mostly applicable general regulation (e.g.
insider trading, market abuse)
Although specific regulation for ‘non sophisticated
investors’ in OTC derivatives markets (risk warnings),
mostly carrying over from the FSA 1986. But caveat emptor
for ‘eligible counterparties’ (Awrey 2011)
Explosion in OTC derivatives transactions
A network of ‘anchors’ for global capitalism replacing the
Gold Standard? (Bryan & Rafferty 2006)
Although there were other ‘regulatory influences’ (Basle,
IAS etc). Most importantly ISDA product based regulation
OTC Derivatives Regulatory Space - Problems with Contracts

Market Market
Actors contracts Actors

listing
& trading
rules
Derivatives
Exchanges
OTC Derivatives Regulatory Space – A Simple Standards Process?

ISDA

member- master
ship
agreements
consultation

Market Market
Actors contracts Actors

listing
& trading
rules
Derivatives
Exchanges
 OTC Derivatives Regulatory Space – Contracts Plus?

Model netting
legislation Ministers/
(c. 40 March 2011) Legislature
ISDA
opinions
Agencies
member- master
Legal ship agreements
Profession Courts
consultation Opinions:
Netting and collateral
(c. 50)
Market Market
Actors contracts Actors dispute
resolution

listing
& trading
rules
Derivatives
Exchanges
Netting and Opinions – So What?
Payment netting permits efficient transaction management
between counterparties producing daily settlement figures
But most important category is ‘close out netting’, permitting
one single settlement figure on ‘termination event’ or ‘event of
default’
Close out netting can conflict with the spirit and substance of
bankruptcy laws
Now enjoys ‘safe harbour’ under Chapter 11 in US.
Controversial systemic risk arguments. Also UK and elsewhere
Position was less clear in other jurisdictions and legal
traditions
Netting opinions also important, especially where netting
legislation does not exist. Similarly collateral opinions
ISDA – In the National State’s Embrace
ISDA is not an SRO
But is also not a self contained private ordering regime
similar to those described by Lisa Bernstein (1992, 2001)
and Robert Ellickson (1986) either
Perhaps the posting of collateral from the outset may
obviate the requirement for interpersonal trust to maintain
relationships between contracting parties (Riles 2008)
Most significant, ISDA does not systematically reject state
made law, it systematically embraces it in order to shore up
its otherwise private contract based regime, for example
through transposition of netting protection
Governments transpose ISDA norms into national law but
without mentioning ISDA itself. A sign that ISDA
standards are very strong (Partnoy 2007)
Implications of the ISDA regime
The ISDA regime appears efficient, at least for the dealers.
Members actively choose to use Master Agreement
From legitimacy standpoint could be seen as a form of
technocratic expertise which is frequently mirrored by the role of
independent experts public policy making (Cafaggi, Scott &
Senden 2011)
Or ‘negotiated governance’. In public/private policy making
‘public acceptability might derive from a variety of sources’.
Efficacy and ‘aggregate accountability’(Freeman 2000)
In Ireland, the netting law was debated in parliament anyway, at
least implicating democratic legitimacy (Schwartz 2002)
In fact the very legitimacy of the concept of the State,
understood through its monopoly in norms production, may
demand actively assimilating such private norms rather than
allowing them to operate as ‘autonomous law’ (Michaels 2003)
Implications of the ISDA Regime
 BUT it is not settled that close out netting exemptions are socially
optimal, benefits may be largely internalised to derivatives dealers
(Bergman et al. 2004).
 May be potential for serious negative externalities through
increased systemic risk (Lubben 2010, 2009; Bliss & Kaufman 2005)
 And in the case of purely speculative derivatives trading, whether
netted and collateralised or not, we have observed the fallout for net
social welfare in the wake of the GFC
 So the State legally shoring up activities which are analogous to
straightforward gambling offers a legal respectability which may be
highly questionable in a normative sense
 Therefore, the ability of powerful actors such as ISDA and their
members to have their norms enshrined, which may not align with
voter interests, may represent a manifestation of a ‘democratic
market failure’ (Benvenisti 1999)
Private Regulation – Forgotten But
Not Gone?
In the wake of the Global Financial Crisis it was decided to
increase public oversight of OTC derivatives
US Wall Street Reform and Consumer Protection Act
EU Market Infrastructure Regulation/MiFID Review
Aim to push much pre-existing OTC derivatives trading on
to ‘designated contracts markets’ or swap execution
facilities, through CCP’s and to record trades through trade
repositories.
Mostly EU/US. Not a significant imperative in Australia
and Singapore. Canada on provincial basis (Quebec)
New relationships, old outcomes? (accountability,
governance)
ISDA at the forefront working with legislators
Implications? Adapting ‘private legal devices’? (Braithwaite
2011)