Introductory Lecture:
8 lectures
3 seminars each 2 hours
Module is not really doctrinal.
Basel accords - main regulatory instruments for global banking regulations.
Sources:
Financial Times
The Turner Review: A regulatory response to the global banking crisis (2009)
Principles of Financial Regulation (Armour et el)
Jay Cullen, Executive compensation in Imperfect Financial Markets (Elgar 2014).
Overview of the financial system:
Banks are not intermediaries of funds.
Actors involved:
,Functions of the Financial System:
allow the pooling of financial capital to bring together small/large investors with savers
Allocate resources
Provide financial intermediation services
Monitor performance of managers
Provide essential payment infrastructure services
To manage risk and uncertainty
Not used to redistribute funds.
Govs have learned to step in and support the financial system to prevent horrendous crashes.
Intro to ‘Market Efficiency’:
Markets encourage a meeting of competitors which encourages efficiency.
‘Securities’:
Shares
Long and medium term debt securities;and
Hybrids between these two types.
Bond is a debt contact
Hybrids = convertible bonds and preference shares
,Financial Market Regulation: Theory v Practice
Designed with 4 main objectives in mind:
1. Promote market efficiency
2. Promote trust in markets
3. Promote financial stability
4. Promote competition
FCA statutory objectives under FSA 2012 s.1A - 1C:
(i) consumer protection - securing an appropriate degree of protection for consumers;
(ii)Integrity - protecting and enhancing the integrity of the UK financial system.
(iii) competition - promoting effective competition in the interests of consumers in the market.
Market Efficiency:
- Financial system ought to allocate capital and other resources to areas which will use it most
productively. To do this, the price system must be free of encumbrances:
“An “efficient” market is defined as a market where there are large numbers of rational, profit-
maximizers actively competing, with each trying to predict future market values of individual securities,
and where important current information is almost freely available to all participants.” (Fama, 1965) -
wanted mass deregulation to have information flow to it.
Traders will not want others to free-ride on their information - hide flaws etc.
Firms will not disclose too much information because they want to profit from it.
Market Efficiency is a PUBLIC GOOD.
•Explicit goal of EU securities regulation
•
–Directive 2003/71/EC (‘Prospectus Directive’), recital (10): ‘The aim of this Directive and its
implementing measures is to ensure investor protection and market efficiency’
, –Directive 2004/39/EC (‘MiFID’), recital (44): ‘... rules are needed ... to promote the efficiency of the
overall price formation process for equity instruments ...’
- Directive 2014/65/EU (MiFID II), recitals (12)-(13): ‘The purpose of this Directive is …to ensure a
high quality of execution of investor transactions and to uphold the integrity and overall efficiency of
the financial system…’
•US: National Securities Market Improvement Act 1996
•
–“Whenever ... the Commission is engaged in rulemaking and is required to consider or determine
whether an action is necessary or appropriate in the public interest, the Commission shall also consider,
in addition to the protection of investors, whether the action will promote efficiency, competition, and
capital formation.” (added to ‘33, ‘34 and ‘40 Securities Acts)
Solution to promoting efficiency - enforce disclosure
Financial Intermediaries: Stands between investors and the market to offer advice and co-ordinate
transactions.
Intermediaries:
Investment banks, hedge funds, lawyers.
2 primary forms of intermediaries:
Informational intermediaries - those who gather information on behalf of others (for a fee) - analysts,
investment banks, rating agencies
Managerial intermediaries - those who manage the wealth of others (for a salary).
Information is vital to the efficiency of the financial system (accurate prices) and to the management
of risk (thereby promoting financial stability)
8 lectures
3 seminars each 2 hours
Module is not really doctrinal.
Basel accords - main regulatory instruments for global banking regulations.
Sources:
Financial Times
The Turner Review: A regulatory response to the global banking crisis (2009)
Principles of Financial Regulation (Armour et el)
Jay Cullen, Executive compensation in Imperfect Financial Markets (Elgar 2014).
Overview of the financial system:
Banks are not intermediaries of funds.
Actors involved:
,Functions of the Financial System:
allow the pooling of financial capital to bring together small/large investors with savers
Allocate resources
Provide financial intermediation services
Monitor performance of managers
Provide essential payment infrastructure services
To manage risk and uncertainty
Not used to redistribute funds.
Govs have learned to step in and support the financial system to prevent horrendous crashes.
Intro to ‘Market Efficiency’:
Markets encourage a meeting of competitors which encourages efficiency.
‘Securities’:
Shares
Long and medium term debt securities;and
Hybrids between these two types.
Bond is a debt contact
Hybrids = convertible bonds and preference shares
,Financial Market Regulation: Theory v Practice
Designed with 4 main objectives in mind:
1. Promote market efficiency
2. Promote trust in markets
3. Promote financial stability
4. Promote competition
FCA statutory objectives under FSA 2012 s.1A - 1C:
(i) consumer protection - securing an appropriate degree of protection for consumers;
(ii)Integrity - protecting and enhancing the integrity of the UK financial system.
(iii) competition - promoting effective competition in the interests of consumers in the market.
Market Efficiency:
- Financial system ought to allocate capital and other resources to areas which will use it most
productively. To do this, the price system must be free of encumbrances:
“An “efficient” market is defined as a market where there are large numbers of rational, profit-
maximizers actively competing, with each trying to predict future market values of individual securities,
and where important current information is almost freely available to all participants.” (Fama, 1965) -
wanted mass deregulation to have information flow to it.
Traders will not want others to free-ride on their information - hide flaws etc.
Firms will not disclose too much information because they want to profit from it.
Market Efficiency is a PUBLIC GOOD.
•Explicit goal of EU securities regulation
•
–Directive 2003/71/EC (‘Prospectus Directive’), recital (10): ‘The aim of this Directive and its
implementing measures is to ensure investor protection and market efficiency’
, –Directive 2004/39/EC (‘MiFID’), recital (44): ‘... rules are needed ... to promote the efficiency of the
overall price formation process for equity instruments ...’
- Directive 2014/65/EU (MiFID II), recitals (12)-(13): ‘The purpose of this Directive is …to ensure a
high quality of execution of investor transactions and to uphold the integrity and overall efficiency of
the financial system…’
•US: National Securities Market Improvement Act 1996
•
–“Whenever ... the Commission is engaged in rulemaking and is required to consider or determine
whether an action is necessary or appropriate in the public interest, the Commission shall also consider,
in addition to the protection of investors, whether the action will promote efficiency, competition, and
capital formation.” (added to ‘33, ‘34 and ‘40 Securities Acts)
Solution to promoting efficiency - enforce disclosure
Financial Intermediaries: Stands between investors and the market to offer advice and co-ordinate
transactions.
Intermediaries:
Investment banks, hedge funds, lawyers.
2 primary forms of intermediaries:
Informational intermediaries - those who gather information on behalf of others (for a fee) - analysts,
investment banks, rating agencies
Managerial intermediaries - those who manage the wealth of others (for a salary).
Information is vital to the efficiency of the financial system (accurate prices) and to the management
of risk (thereby promoting financial stability)
