Question

What should be the role of regulation in financial markets?

• What are the implications of financial regulation?

• Discuss the effect such legislation would have on the on financial markets:

o For each proposed regulatory control, discuss the impetus for its implementation (i.e. what is the issue it is trying to address) as well as the advantages and disadvantages to the financial markets.

o Discuss why and some “benefits” and “costs” of past regulations that have been implemented.

Answer 1

What should be the role of regulation in financial markets?

There are several cases, where when unregulated, the Financial markets have duped millions of dollars, from unwitting customers, and this has led to several interventions being made subsequently and changing the code to include stringent regulations to prevent malpractices.

Right from selling penny stocks to unwitting customers with very limited assets themselves, to retirement savings being put into risky assets that are way higher in risk than the risk profile of the customers' money being utilized there have been innumerable circumstances which have shown that an unregulated market is a very dangerous tool in the hands of unethical people.

• What are the implications of financial regulation?

Financial regulation has several implications:

1. Adequate corporate disclosures to ensure free and fair communication of information is being made by the stakeholders.

2. Prevention of insider trading, by introducing stringent penal provisions.

3. However too much regulation can also lead to certain stifling of free capitalism, in the positive sense. Like innovation and freedom to do trade.

Certain examples of the impact of regulations

Regulation	Positive	Negative
Regulation on Credit Agencies as per Basel II Norms	More standardized	However over reliance on two major ratings agencies , cannot prevent altogether the risk of collusion
Bitcoin trade prevented in several countries	Risk of fraud and misinformation and illegal activities is reduced	The objective of an independent free and fair computerized ledger, utilized as an electronic currency, thereby eradicating the over dependance on foreign exchange. The said objective could be missed.