Wednesday, April 29, 2009

Ethiopis Tafara: Observations On International Securities Regulation

In a February 23, 2009 speech before a meeting of the Committee of European Securities Regulator, Ethiopis Tafara, Director of the SEC's Office of International Affairs laid out some very astute observations about the nature of the international securities markets, and the future of regulation.

Mr. Tafara observed that there are four key characteristics of the modern financial market:
  1. its global nature and the resulting mobility of capital;

  2. the significantly increased competition among financial service providers;

  3. the elimination of differences between historically separate financial products, sectors, and actors; and

  4. the development of a large and relatively liquid unregulated institutional financial market paralleling the regulated markets.
Based on a series of conversations with regulators and finance ministers and officials throughout the world, Tafara also set out four goals for any new regulatory framework.
  1. [T]he new regulatory framework must address the issue of increased systemic risk, while not suppressing risk-taking per se.

    . . .

    As a corollary, we need a regulatory framework that provides prudential regulation for those financial intermediaries that are too big too fail.

  2. Second, we need the regulatory framework to address the misaligned incentives that lead to taking excessive risk.

  3. Third, we need a regulatory framework with better disclosure, so that lenders can better determine counterparty risk.

  4. Fourth, the regulatory framework needs to account for the fungibility of financial products, actors and markets.

  5. Fifth, the regulatory framework of the future must be responsive to the fact that capital is mobile, markets are interconnected, and technology makes the movement of capital irrepressible.

  6. Finally, we need a regulatory framework that is ruthless in pursuing the protection of investors.
Tafara warned that, while we are focused on mitigating the effects of the current crisis, we should be mindful of what the crisis is revealing about the nature of the new global economy, and the "fertile ground" from which may spring the next crisis.

The full text of Mr. Tafara's February 28, 2009 remarks is available at:

Video of Mr. Tafara's remarks is available at: