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Thursday, May 25, 2006

Challenges of national regulation of international markets

The Bundesbank has proposed what the Financial Times characterizes as a "system of 'self-regulation plus'" under which hedge funds would "open up their books for public grading by rating agencies and introduce a code of conduct." The proposal reflects concern about the risks entailed by heavy hedge-fund borrowing from banks and recognition "that national regulatory authorities would be virtually powerless if they acted alone."
Ralph Atkins and Mark Schieritz, "German central bank calls for hedge fund openness," Financial Times, U.S. edition, 17 May 2006, 2.
This calls to mind the words with which Alan Greenspan urged Congress in 2000 to exempt the then-$80 trillion market for over-the-counter derivatives from regulation, which illustrated how the "race to the bottom" dynamic, so familiar in U.S. history, works internationally: "I see a real risk that, if we fail to rationalize our regulation of centralized trading mechanisms for financial instruments, these markets and the related profits and employment opportunities will be lost to foreign jurisdictions that maintain the confidence of global investors without imposing so many regulatory constraints."
Joseph Rebello and Dawn Kopecki, "Greenspan Urges Congress to Execmpt OTC Derivatives From U.S. Regulation," Wall Street Journal, 11 February 2000, C11.

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