FSA To Review Trading Regulations

by Robin Pilgrim, LawAndTax-News.com, London

30 August 2010

The UK Financial Services Authority (FSA) has published a discussion paper on fundamental changes that are necessary with respect to the regulation of trading activities.

Since the Turner Review was published, the Basel Committee on Banking Supervision (BCBS) has proposed several reforms to the prudential regime for banks and, in addition, has mandated a fundamental review of trading activities, in line with the review’s recommendations.

The FSA said that it believes that the delivery of a new, robust, long-term approach to prudential requirements for trading activities is one of the key areas of regulatory reform that must be delivered to build a stronger financial system. The outcome of the BCBS’s fundamental review is central to achieving this objective internationally, the FSA said.

The consultation paper seeks comment in relation to areas that the FSA has identified require reform, to target structural weakness in the UK, which the Authority said exacerbated the build up of risk ahead of the global financial crisis.

Commenting, Paul Sharma, FSA Director of Prudential Policy, said:

"There are clear benefits of participants in traded financial markets taking risks to facilitate a more efficient allocation of resources across the economy. Where these gains in efficiency are real, and the risks posed are adequately-captured or –controlled, we are not seeking to undermine these activities.”

"However, the financial crisis has highlighted that, for trading activities in particular, an over-reliance on the principles of efficient financial markets can lead to severe consequences when risks are misunderstood at a system-wide level. The balance needs to be redressed to ensure that risks posed to the system as a whole are more adequately reflected in the structure of prudential regulation."

In its discussion paper, the FSA identified three areas, requiring reform, for discussion:

• The valuation of traded positions, and the uncertainty of such;
• The need to comprehensively change the capital framework to “bring greater coherence and reduce the opportunities for structural arbitrage within the banking sector and the wider financial system"; and
• Firms’ risk management and modelling standards.

The closing date for responses is November 26, 2010. The FSA has said it will issue a feedback statement in the first half of 2011.

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