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April 06, 2007
Effective Self Regulation in Emerging Markets
In emerging financial markets, Self Regulatory Organizations (SROs) have demonstrated greater flexibility to adapt regulatory requirements to a rapidly changing financial environment. Self-regulation has generally been found to be an effective regulatory conduit as market participants with an intimate knowledge of the market have been able to maximize the regulatory benefits (e.g., orderly markets, customer protection, reduction of systemic risk) while minimizing the business costs. The involvement of SROs in regulation generally has resulted in a tighter degree of compliance by the market participants. Industry representation and self-regulation thus has become integral parts of most regulatory structures in emerging markets.Is there an inherent and serious conflict of interest between a profit-making marketplace and its self-regulatory obligations? With the inherent competitiveness brought about by globalization and integrated markets, the prime focus of self-regulation has been in ensuring market discipline and systemic stability.
In financial markets that are evolving fast and depending more and more on market forces for price discovery, the role played by SROs is significant.
First, since the market is the driving force, financial stability concerns unify the self regulatory obligations and profit maximizing principles.
Second, the regulator's role in encouraging such competitive forces and to promote transparency in the financial markets adds to the ability of the SROs to function effectively. A major challenge that regulators typically face in devising and administering a statutory oversight framework is to provide an appropriate level of government oversight of SRO activities without restricting SRO's ability to respond quickly and flexibly to changing market conditions and business needs.
Third, it is the experience that the relation between the regulator and SROs , to a great extent, gets determined by market conditions. Any instability in financial markets, because of the externalities, makes the regulator to take an incisive look at the financial market activities. While this short run raid of hectic regulatory activity is to be a feature of financial markets in emerging markets, there should be consistent collaboration between the regulator and the SROs over a longer span to build a strong and resilient financial architecture that will ensure high growth and contribute to price stability.
( Read the full paper on SROs at sunandoroy.googlepages.com/workingpapers)
Posted by sunandoroy at April 6, 2007 12:52 PM
