By now, almost everyone can agree that current regulatory regimes (or the implementation thereof) have not adequately addressed new financial products and practices that have developed in the past few years. How much loss might have been avoided if effective new approaches to regulation had been implemented at the turn of the century? Having “whiffed” on the first try, Congress and regulators are winding up for another swing.
These are some of the ideas that seem most likely to be implemented in the foreseeable future:
- Improved settlement system for credit default swaps, and perhaps other new regulation of these instruments. A “central counter party” system for these instruments is currently under development. New York currently plans to regulate some credit default swaps as financial guarantee insurance. The SEC and others have argued that credit default swaps are related to regulated instruments in ways that can frustrate regulatory objectives if the swaps are not also regulated.
- Regulation intended to reduce the likelihood that home mortgages will be issued on terms not appropriate for the homebuyer.
- Mechanisms to enhance the reliability of NRSRO ratings.
- Increased regulation of, or at least transparency for, hedge funds.
- Merger, or at least better coordination, between the SEC and CFTC (except to the extent that certain functions of those entities are assigned to other governmental bodies, as has been proposed in a Treasury Department “Blueprint”).
- Federal regulation of life insurance, to which insurers can “opt in,” as an alternative to regulation by individual states.
- A revised modus operandi and regulatory scheme for Fannie Mae and Freddie Mac (if those entities are not wholly privatized).
- A new conceptual framework for how money-market funds should function and be regulated (and whether and how they should be insured), in relation to other depository institutions.
Some of these ideas will not make it across the finish line. Also, it is inevitable that many other ideas will arise in the coming weeks and months.