Regulatory Principles for the Financial System

Ho, Palacios, and Stoll consider the regulatory structure for derivatives and suggest several principles that an improved system should embody: transparency, competition, and incentive compatibility. The primary objectives of regulation should be maintaining the integrity of the financial network against systemic risks and protection of customers (with the former more in need of formal regulation than the latter). A general theme is that attempts to regulate the fine details of the financial system are not likely to be as effective as setting forth general principles that can be applied in a dynamically evolving environment. Competition is highlydesirable, among both financial institutions and regulators. Sharing responsibility across multiple regulators would promote innovation and reduce the chance of “regulatory capture” by the industry. TOPICS:Derivatives, financial crises and financial market history, exchanges/markets/clearinghouses