Something surprising appears to be underway behind two major financial crime stories that broke over the past several weeks – regulators and law enforcement officials domestically and internationally can work together for positive results.
To recap, a coalition of sorts joined forces to bring in alleged “Flash Crash trader” Navinder Sarao, a British futures trader. The CFTC, the U.S. Department of Justice and U.K. authorities acted in conjunction to build a case and take action against Sarao, who has been accused of manipulating the E-Mini S&P 500 futures market, and thus helping ignite the Flash Crash. His alleged crimes involve layering orders for false trades to move prices in his favor, which is now known as spoofing.
In another example after the “Flash Crash Trader” story, news broke that Deutsche Bank had announced a $2.5 billion settlement after a seven-year probe into the bank’s manipulation of the London Interbank Offered Rate (Libor) by its traders. The investigations exposed widespread fraud via the trading floor and the corner office, according to regulators and law enforcement officials. (Libor is the global benchmark for setting the value of financial instruments across the globe and is intended to represent the cost of interbank borrowing.)
I acknowledge that the multi-faceted conspiracies at the heart of the Libor scandals and the Flash Crash need a tightly integrated coalition of international regulators and other authorities. But there are many lessons that the industry should learn from these highly successful efforts.
In fact, Mary Kopczynski, founder and CEO of regulatory IT consultancy 8of9 Consulting, said it best in our FTF News story about the Deutsche Bank situation. “I was impressed,” Kopczynski is quoted, “I think this is one of the most well-coordinated regulatory actions I’ve ever seen. So from that perspective it’s very nice to see regulators cooperating on this scale, but I would also like to see better coordination between the policy side of things and the enforcement side, going forward.” I would add that greater coordination on policy could greatly streamline reporting requirements for industry participants.
Kopczynski points to the next big challenge. However, getting U.S. and non-U.S. regulators to agree on policy is going to be a longer process than reacting to financial crimes that have to be stopped post haste. For instance, the CFTC, which aggressively wrote and implemented Dodd-Frank reforms for over-the-counter (OTC) derivatives, is still trying to find policy harmony with its counterparts in Europe and Asia-Pacific.
Let’s hope the aforementioned successes will cause the regulators to set aside their differences and work toward harmonization. To quote the great comedian Judy Tenuta: “It could happen.”
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