Quotidien Fintech, Blocktech, Deeptech / Daily News

Lundi 4 Juin 2012

Deforming the reforms, when financial institutions are a transaction facilitator, speculator and owner of Commodity Exchanges

Mr. Leon Hess, the legendary founder of Hess Oil and then the dean of the oil industry, said to the Senate Committee on Government Affairs on November 1, 1990. " I'm an old man but I'd bet my life if the Merc (the New York Mercantile Exchange) was not in operation there would be ample oil and reasonable prices all over the world without this volatility.

Kersi Porbunderwalla
Kersi Porbunderwalla
In the wake of the 2B usd loss at JPMorgan Chase, let’s focus on some of the issues from a US standpoint, because in many respects it does affect European banks and the rest of the world. The EU commission is currently in the process of finalizing added demands to the European financial and capital markets on restrictions and capital requirements.

Therefore in the EU we naturally will have just as many changes in the European legislation on financial and capital markets compared with the US Dodd Frank Act, because the financial sector is global. The jury is currently still out on whether the implications of these legislation in the US, EU and elsewhere are rather poorly thought, and do not provide the oversight authorities with the tools that they need, quite the contrary.

Are banks gambling with our money, and piggy backing on public financed initiatives because of the minimum cost of money, a government that protects the financial sector? Or is it access to cheap taxpayer funded programs that are used to speculate on the exchanges, like copper, oil, food grains etc?

Back to basics
Until recently the 37 pages no loopholes, no exceptions, no ambiguous language Glass-Steagall Act, from 1933 covered most of the requirements of transparency, accountability, segregation of responsibilities and managing Risk and Compliance. However, now it’s the 2,319-page financial reform monster called the Dodd-Frank Act that is so watered down and burdensome to manage due to the lobbyists loopholes.

In a few weeks the 800 page Volker Rule (a specific section of the Dodd–Frank Act to restrict banks from making certain kinds of speculative investments that do not benefit their customers). However, compromising politicians, special interests lobbyists and others have watered it down to the extent that the underfunded, understaffed oversight regulators at the SEC will probably fail their mandate due to the realities and practicalities of impossible enforcement.

Many claim that the good old Glass-Steagall Act, the costly 66 page SOX Act (2005), or the 145 page long Gramm-Leach-Bliley Act (1999) are considered to be among the most consequential legislative acts for the banking and financial industry.

Segregation of ownership in the commodities market
There's nothing wrong with a commodities futures exchange. In fact it's needed for many businesses. E.g. Mining companies lock in sales prices using forwards. Airlines lock in their fuel costs using futures or to pay a rather large invoice from Boeing were you lock in the USD amount disclosed in your balance sheet.

For the discerning CFO, it’s a smart business perspective, called insurance. You pay a premium to reduce volatility. A few years ago, Southwest Airlines was the only US airline that stayed out of chapter 11 proceedings because they had locked up fuel contracts before oil went through the roof. It was a good move because it allowed them some stability with respect to one of their major variable costs. Prices go up or down, however it is often a smart move to pay the premium for the option of security. That's how most businesses use these securities. You need a bank or a financial institution to complete the transaction.

Then there are financial institutions like MF Global. They were apparently not satisfied to be just a transaction facilitator in the commodities market. They used client funds for it and went broke in 2011.

Some banks are not content to play in the casino at both sides of the gambling table to generate huge profits with the underwritten and abundant ready money provided access to cheap chips.

J.P. Morgan Chase is buying an important stake in the casino itself, as reported by Bloomberg buying a stake from MF Global in the London Metals Exchange that will make it the largest single shareholder ahead Goldman Sachs.

The Telegraph reported that J.P. Morgan Chase was the "mystery trader" that bought £1billion-worth of copper on the LME that pushed up the price of copper at the time to the highest level since the financial crisis in October 2008.

The 2B usd loss at the JPMorgan Chase, has given an early warning sign that the entire financial services sector including the explosive 600 trillion usd derivates market, is in need of a disaster management system that soon must be in place to avoid another severe meltdown.

Are the politicians, international oversight authorities and stakeholders equipped to provide the market with ‘The Regulator's Guidelines’ on the issues of securing financial and transactional integrity of being in compliance?

At the Copenhagen Compliance Conference on the 6th and 7th June there will be ample time to discuss the above questions and the current financial compliance issues with a series of international experts.

By Kersi porbunderwalla
Kersi Porbunderwalla is the founder and CEO of Riskability®, Copenhagen Compliance® and Copenhagen Charter®. After his early retirement from ExxonMobil, Kersi has been involved in several Global Good Governance, Risk Management and Compliance (GRC) Projects for multinationals like IBM, Shell, BP, Volvo and others. He continues to implement GRC journeys for a variety of clients to develop custom tailored GRC folder that includes methodologies, roadmaps, and specific solutions to assignments, training and certification. Kersi conducts workshops, seminars and conferences that focus on developing and implementing GRC applications & frameworks into operational environments. He is a consultant, instructor, researcher, commentator and practitioner on 4 continents.


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