Common voluntary rules urged
for global financial markets
Paris,
10 December 1998 -
Thomas A. Russo, Managing Director and Chief Legal Officer of Lehman Brothers,
today called for a single body of voluntary rules to govern international finance
that would replace the existing multiplicity of conflicting rules imposed by
regulators and self-regulators worldwide.
Addressing the Financial Services and Insurance Commission of
the International Chamber of Commerce, Mr Russo said: "These different
regulatory requirements fragment and divide businesses in a manner that often
defies logic and prudent management."
He said that from a corporate point of view, it would be far
preferable to be subject to a single set of rules embodying best practices that
would be drawn up by the financial services industry participants and associations,
and endorsed by governments.
Mr Russo suggested starting with a "tabula rasa" –
an assumption that multiple rules, regulatory bodies and jurisdictions did not
already exist.
The guiding principle for any new regime should be transparency,
he said. "Transparency is to a marketplace what freedom was to the American
Revolution. It is a goal to obtain and, once obtained, a guiding principle to
maintain." He went on to define transparency as the key factor in stripping
away confusion, ambiguity and conflict between regulatory structures.
Implementing transparency would involve the assumption of seven
guiding principles – the key chapters in a "mythical textbook of best
practices", he said. They are:
- Risk Management: incorporating properly staffed and equipped
risk management teams for all financial institutions, reporting at Chairman
or CEO level, and operating independently of the business.
- Credit Procedures: operating with similar disciplines, aggregating
exposures where possible and netting where appropriate.
- Sales practices: including codification of the relationships
between a financial institution and its counterparties, aimed at avoiding
subsequent litigation, and education for salesforces particularly around leveraged
or derivative products.
- Credit information availability: designed to address the
issue of outdated or opaque information about counterparties such as hedge
funds. The extent of disclosure would depend on a mutually agreed template
for disclosure.
- <
font size="2">Documentation practices: designed to include credit approval
and emphasising the authority of signatories. They would be controlled by
a ‘documentation deficiency list’, which imposes specific time periods
for the execution of documentation.
Enhanced roles for internal and external audit and compliance
departments: they would assume greater responsibilities under the ‘tabula
rasa’ regime where regulatory bodies do not exist and rules are enforced
voluntarily.
New role for government: it would differ from the usual role
of regulator, and would imply the provision of more information to governments
globally to facilitate judgements regarding systemic risk.
Commenting further on his ‘tabula rasa’ approach,
Mr Russo argued that a new system must involve end-users of financial markets
such as pension funds and international money managers, in order to achieve
the goal of transparency. However, it would be misleading to devise specific
regimes for types of market players such as hedge funds. A more consistent framework
would be an overall approach to systemic risk that avoided the contradictions
arising from "entity typecasting", he said.
Having set out the "mythical best practices" approach,
Mr Russo discussed how change could be achieved. Citing the successful work
of the Derivatives Policy Group (DPG) in drawing up voluntary guidelines governing
over-the-counter business, he stressed the importance of government encouragement.
A G-8 meeting, supported and aided by a prominent group such as ICC, would arguably
be the most appropriate forum for the project.
With the project launched in this way, and governments
encouraging the development of the seven chapters, industry could proceed to
write the code. Putting the case for voluntary compliance, Mr Russo noted: "Market
participants tend to embrace endeavours in which they participate and resist
restrictions superimposed on them."
Full
text of Mr Russo’s address