Tuesday, June 10, 2014

Chief of German Financial Regulatory Authority Urges Orderly Resolution Regime for Derivatives Central Counterparties

While investors tend to be at a disadvantage to providers of financial products and thus need the protection of an appropriate regulatory framework, noted Dr. Elke König, President of the German Federal Financial Supervisory Authority (BaFin),  investors have the right to invest in risky instruments and should not be spoon feed by regulators. In remarks at the agency’s annual conference in Frankfurt am Main, the BaFin chief said that regulators cannot cocoon consumers and investors and ring-fence or prohibit all offerings that are even slightly risky. Dr. König emphasized that anyone who takes away the right of private investors to invest their money in risky assets encroaches on their individual freedom to an unreasonable degree and harms competition. 

Regulators must keep this in mind, even when they are discussing how to regulate the unregulated parts of the financial  markets, said BaFin’s President. But she hastened to add that the market as it stands is by no means over-regulated. In fact, a number of important regulatory steps still have to be taken. For example, the requirement to clear standardized OTC derivatives through central counterparties has not solved everything, she observed, what is logically now needed is a regulatory framework for the orderly resolution of central counterparties.        

BaFin’s President also emphasized the importance of creating a cross-border resolution regime for systemically important financial institutions. She noted that the European Union has already laid the foundation for such a regime. The flaw she sees is its scope: If the goal is to abolish the de facto state guarantee for systemically important financial institutions, she reasoned, policy makers and regulators must design a global resolution regime that is effective cross-borders

Similar to investor protection, financial stability is a question of the right amount of regulation. 
What is needed here is a regulatory framework that protects the public good of financial stability and mitigates the destructive forces of a crisis, explained Dr König, adding that at the same time market participants must be given enough room to innovate and do business.