Policy Tools - Are the Regulators Finally Taking to Their Roles?

Ben Bernanke is talking about restoring uptick rule. Regulators are switching to TCE ratio from Tier 1 ratio as a measure of capitalization. It seems that now the government is effectively out of financial means to solve the crisis and is reaching in deeper into policy toolbox. Will it offers any relief? Many market participants considered abolition of uptick rule in 2007 as a bad idea. Then why is it being restored only now?

On a separate note, there is an ardent discussion over clearance and settlement of credit-default swaps. This market covers over $62 trillion of notional value; however, it is little regulated or organized. A potential tip of this mass is extremely dangerous. Market participants themselves have long recognized this danger and have collaborated to create a solution. A consortium of industry associations and financial institutions set a voluntary deadline of November 30, 2008 to establish central clearing of index CDS's. Ccorp located in Chicago and subsidiary of Atlanta-based IntercontinentalExchage, had been developing a trading platform and was prepared to go live on December 2, 2008 given regulatory approval. Other industry participants, such as Eurex, NYSE Euronext and a joint venture between CME Group and hedge fund Citadel were also working on competing platforms. So the industry recognized the threat, proactively worked on the solution and insistently seeked approval by regulators such as Timothy Geithner, current Treasury Secretary and then Chairman of New York Fed. However, both November 30 and December 2 deadlines were missed by the regulators even though they started reviews of risk management and platforms' design. They also took the position of not endorsing any particular platform but letting the market decide on the best solution.

One has to wonder if banks and other financial institutions should have been as much scolded as they recently have for loose practices and runaway capitalism when even their own push for regulation and standardization was neglected by regulators in the midst of financial crisis.