Regulators' response to the current crisis and the upcoming reregulation of financial markets: One reluctant regulator's view

University of Pennsylvania Journal of International Economic Law

Volumn 30, Issue 4, 2009, Pages 1147-1155

  Enriques, Luca ^a  

^a UNIVERSITY OF BOLOGNA   (Italy)

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EID: 67650567227     PISSN: 10867872     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (20)

1. Some early studies are already showing this. See MATTHEW CLIFTON & MARK SNAPE, THE EFFECT OF SHORT-SELLING RESTRICTIONS ON LIQUIDITY: EVIDENCE FROM THE LONDON STOCK EXCHANGE 3 (London Stock Exchange 2008), http://www.londonstockexchange.com/NR/rdonlyres/ 5EDD66EF-B589-4974- 95Bl-73C51FlC9DFC/0/ ShortsellingRestrictionsandMarketQualityDecember2008. pdf (showing that after the FSA's decision to ban short-selling the bid-ask spread for banned stocks increased significantly, while a decline was observed in depth, trades, volume and turnover);
2. IAN W. MARSH&NORMAN NIEMER, THE IMPACT OF SHORT SALES RESTRICTIONS, 11 (2008) (independent study commissioned by the International Securities Lending Association, the Alternative Investment Management Association, and the London Investment Banking Association), http://www.cass.city.ac.uk/media/stories/resources/the-impact-of-short-sales -restrictions.pdf (showing that there is no strong evidence that short-selling restrictions changed stock behaviour either in the U.K. or in other countries).
3. In theory, one could counter that this justification only holds if we take the presence of a separate securities regulator as a given. With a single financial regulator in charge, there would be other measures it could take to "do something," making a ban on short sales unnecessary. It is a fact, however, that the first regulator to ban short sales on financial stocks, a few hours before the U.S. SEC on the same day, was a single regulator: the U.K. FSA.
4. The uptick rule provided that, with limited exceptions, a listed security might be sold short either at a price above the price at which the immediately preceding sale was effected (plus tick), or at the last sale price if it is higher than the last different price (zero-plus tick). The rule was repealed by the SEC on July 6, 2007.
5. See Securities and Exchange Commission, Regulation SHO and Rule 10a- 1, Release No. 34-55970, 17 C.F.R. pts. 240, 242 (Jul. 3, 2007), available at http://www.sec.gov/rules/final/2007/34-55970.pdf (defining the uptick and zero-plus tick rules). Since then, several voices have called for the rule to be restored:
6. see, e.g., Charles R. Schwab, Restore the Uptick Rule, Restore Confidence, WALL ST. J., Dec. 9, 2008, at 17. On Russian regulators' decisions to shut down markets in October 2008,
7. see, e.g., Charles Clover, et al., Russian Trading Halted after Plunge, FIN. TIMES (London), Nov. 13,2008, at 33.
8. An important informal feature of the SEC governance is the revolving door system: many SEC employees have previously and subsequently served in law firms or financial institutions, usually working at the SEC for just a few years.
9. In the following no specific attention will be paid on political control mechanisms. Suffice it to say here that the FSA is much more independent from political bodies in making its budget decisions and in levying fees from market participants than the U.S. SEC. A form of accountability towards the market exists, in the form of a prior consultation on the entity and distribution of fees among the various market participants.
10. See Roberta Romano, The Sarbanes-Oxley Act and the Making of Quack Corporate Governance, 114 YALE L.J. 1521, 1525-26 (2005) (describing the "peculiar disjuncture between the substantive corporate governance provisions of SOX and the source of Enron's failure").
11. Id. at 1526 ("The failure of Enron, then, provided the occasion for implementation of corporate governance initiatives that were already in the policy soup.").
12. See, e.g., JOHN G. FRANCIS, THE POLITICS OF REGULATION 182 (1993) (comparing financial regulatory regimes to armies reorganizing to fight war they have just lost and predicting "a loss of confidence in the regulatory structure" as the likely result).
13. See Luca Enriques & Matteo Gatti, The Uneasy Case for Top-Down Corporate Law Harmonization in the European Union, 27 U. PA. J. INT'LECON. L. 939, 998 (2006) (describing the context of Hertig's comment, and how it is very unrealistic to expect nothing to be done).
14. See, e.g., Louise Story, On Wall Street, a Bonus Season of Uncertainty, INT'L HERALD TRIB., Dec. 10, 2008, at 11 (describing how Wall Street banks were to cut annual bonuses);
15. Katrin Bennhold, Report Pinpoints Faults at Societe Generale, INT'L HERALD TRIB., May 24, 2008 (reporting that Societe Generale was planning to correct its risk control system after huge unexpected losses emerged as a consequence of a trader's fraud);
16. KPMG, Lack of Stature and Resources for Risk Management Cited as Leading Contributors to Credit Crisis, KPMG Study Finds, Jan. 6, 2009, available at http://www.us.kpmg.com/RutUS-prod/Documents/12 /Lack-of-Stature.pdf (reporting results of a survey among banks' risk managers according to which 78 percent of the respondents declare their intention to improve methodologies to measure and report risks).
17. See, e.g., Alistair MacDonald, Britain's FSA Begins to Drop Its Light Touch, WALL STREET J. (European Edition), Jan. 5, 2009, at 1, 28;
18. Lina Salgol&Brooke Masters, FSA Code Will Aim to Tackle Incentives for Risk-taking, FIN. TIMES (London), Oct. 9, 2008, at 4 (FSA has recently started requiring that bonus plans be linked to long-term results).
19. See Appendix.
20. Gattopardesco is defined as a policy relative to a conservative policy based on the belief that the status quo can best be defended through reforms that merely change the surface of things. See generally GUISEPPE DI LAMPEDUSA, THE LEOPARD (Archibald Colquhoun trans., Pantheon Books 2007) (1958).