UPFRONt
Regulatory Convergence
Both the FSA and SEC elevate their risk functions
By Juliette Fairley and ted Knutson
The principal U.K. and
U.S. financial market regulators have long talked the talk of
cross-border cooperation and
information sharing. Financial
Services Authority chief executive Hector Sants and Securities and Exchange Commission
chairman Mary Schapiro made
it more tangible in September,
formally announcing as part of
their agencies’ three-year-old
“strategic dialogue” a plan to
“explore common approaches
to reporting and other regulatory requirements for key market
participants such as hedge funds
and their advisers.”
At the same time, each of the
bodies was reorganizing to raise
the profile of risk management.
On September 16, Schapiro announced the creation of SEC’s
director Jon Pain, who ran the
retail side, is now head of the
combined supervisory organiza-
tion, while Dewar, who had been
the wholesale chief, took charge
of risk – a mandate that includes
risk identification, risk manage-
ment and policy formulation.
The SEC elevated risk to the
same status as four other top-level divisions: those of corporation
finance, enforcement, investment management, and trading and markets. The Office of
Risk Assessment, which the SEC
created in 2003 and had been
headed since early 2008 by Jonathan Sokobin (interviewed in the
June 2009 Risk Professional), and
the Office of Economic Analysis
were combined under Prof. Hu,
whose academic interests includ-
ed derivatives markets, hedge
Sally Dewar
The SEC is putting derivatives and
trading expertise into its risk division.
Division of Risk, Strategy and
Financial Institutions, and the
appointment of University of
Texas law professor Henry Hu
as its director. And on October
1, the FSA established, as part of
an historic overhaul, what Sants
calls a “single integrated risk
unit” led by managing director
Sally Dewar.
FSA unified its previously
divided retail and wholesale
markets supervision. Managing
fund and mutual fund regulation
and corporate governance.
Improved Coordination
Schapiro’s description of her ob-
jective, in a September speech to
the Financial Services Roundta-
ble, could have applied to Sants’
as well: “a cohesive, integrated
approach to assessing risk and
analyzing market trends.” She
told the Securities Industry and
Financial Markets Association
annual meeting in October that
the new division will “help link
existing know-how from one seg-
ment of the agency to the needs
of another” and “be populated
by people with current street
experience in derivatives, hedge
funds, trading and risk.”
Schapiro wants to ensure that
activities that materially contribute to a company’s risk profile
are fully disclosed to investors.
“We might not be able – nor
would we want – to ban risk taking,” she has said. “But we can
expose it.”
Holding B.S. (molecular biophysics and biochemistry), M.A.
(economics) and J.D. degrees
from Yale University, Hu has
declared repeatedly as an expert congressional witness that
he favors tighter controls over
derivatives. He had spoken, for
example, of a “repeated pattern
of outright mistakes, harmful to
shareholders and societies alike,
even at ‘sophisticated’ entities.”
He also delved into the hazards
of “empty creditors:” those that
may have control rights flowing from a debt contract but, by
simultaneously holding credit
default swaps, have little or no
economic exposure to the debtor
and weakened incentives to work
with a troubled company to
avoid bankruptcy.
Dewar, a veteran of the London Stock Exchange Listing Authority and the FSA’s markets
division who was in charge of
wholesale markets since January 2008, will be helping carry
out a master plan that Sants has
described as providing “greater
clarity internally and externally as to the way we work and
reinforc[ing] our role as micro-prudential supervisor based on a
model of integrated risk analysis
and integrated supervision. This
reorganization will ensure our
changing work practices and ensure our judgments are successfully institutionalized.”
Dewar’s brand of risk-focused
advocacy was on display two
weeks before she moved into
the new role in a critique of the
proposed European Union alternative investment fund management directive. She deemed the
plan’s “scope and thresholds too
broad and too low to adequately
focus on those alternative funds
and managers which pose significant risks to financial stability and market efficiency.” She
stressed the need to “harmonize
collection and sharing” of hedge
fund information in a way that
“reduces the compliance burden
on fund managers while allowing the SEC and FSA to better
identify risks to their regulatory
objectives and mandates.”
