US derivative rules are the latest example. Reuters reports that Wall Street will avoid these rules by running derivative trades through their stand-alone subsidiaries based in London.
Regular readers know that the combination of complex rules/regulation and regulatory oversight is a substitute for transparency and market discipline. A substitute that our current financial crisis shows is doomed to fail as Wall Street has an incentive (to make money) to finds ways around these complex rules/regulations.
The better choice is to focus on bringing transparency to all the opaque corners of the financial system.
Banks, for example, should be required to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.
With ultra transparency, it does not matter where in the world the banks enter into a derivative contract. This contract is reported to investors. Investors who can use this information in their independent assessment of how risky the bank is and in setting how much exposure they can afford given the risk of the bank.
Wall Street banks are looking to help offshore clients sidestep new U.S. rules designed to safeguard the world's $640 trillion over-the-counter derivatives market, taking advantage of an exemption that risks undermining U.S. regulators' efforts.
U.S. banks such as Morgan Stanley and Goldman Sachs have been explaining to their foreign customers that they can for now avoid the new rules, due to take effect next month, by routing trades via the banks' overseas units, according to industry sources and presentation materials obtained by Reuters.
The rules, a result of Washington's Dodd-Frank reforms, aim to prevent financial catastrophes in the over-the-counter (OTC) market - a huge, opaque market which is partly blamed for felling Lehman Bros in 2008 and fuelling a global financial crisis....
Wall Street has launched a last-minute effort to show foreign counterparties how they can keep doing business together and still keep trades out of the U.S. regulatory net.
The banks' solution is to route trades via their non-U.S. affiliates - subsidiaries with their own separate balance sheets, often in London - rather than the parent banks. It is a detour that could eventually be shut down by foreign regulators, but for now offers shelter from the U.S. regulatory storm.
"What we are seeing now is a gamesmanship dance in which firms do whatever they can to avoid regulation, which is an age-old phenomenon," said Thomas Cooley, a professor of economics at New York University's Stern School of Business.There is no reason to subject the stability of the financial system to Wall Street's ability to avoid regulation, now or in the future.
By requiring the banks to provide ultra transparency on all of their global exposures, the stability of the financial system is insured as the banks are subject to market discipline to restrain their risk taking.