; Regulatory reform: evolution not revolution
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Regulatory reform: evolution not revolution

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The regulatory reform objectives set by the G20 are being pursued primarily by key international regulatory bodies, one of which is the Australian Securities and Investments Commission (ASIC). The reforms cover significant issues such as short selling, minimum standards for credit rating agencies (CRA), promoting exchange trading and central counterparties in credit default swap markets, and greater regulation of hedge funds. The focus on fixing past problems could lead to insufficient attention on the future. These risks can translate into inefficiencies in the market and increases to the cost of capital. One way to minimize these risks is to assess the reforms within an agreed conceptual framework. In the Australian context, the economic or philosophical underpinning of much of the securities and investments regulations in the Corporations Act is efficient markets theory. Reforms to areas such as securitization, OTC markets and accounting and audit standards can also be made without the need for wholesale change.

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     As the global regulatory agenda that has arisen from the
     global financial crisis continues to take shape, it is vital that
     we maintain a proper balance between market efficiency and
     investor protection. An agreed conceptual framework for reform
     will be critical to the achievement of this balance.

     ThE rEgulATory rEForm objectives set by the                 framework. The testing of the assumptions on which
     G20 are being pursued primarily by key international        it is based is likely to point the way to reforms that
     regulatory bodies, one of which is the Australian           could achieve better results for the balance between
     Securities and Investments Commission (ASIC).               efficiency and investor protection.
         The reforms cover significant issues such as                  In the Australian context, the economic or
     short selling, minimum standards for credit rating          philosophical underpinning of much of the securities
     agencies (CRAs), promoting exchange trading and             and investments regulations in the Corporations Act
     central counterparties in credit default swap markets,      is efficient markets theory.
     and greater regulation of hedge funds. This agenda                Efficient markets theory has a number of
     is being approached largely on an issue-by-issue            assumptions, many of which have been called into
     basis and this approach contains some inherent risks.       question, or are at least subject to re-examination,
         Different bodies dealing with the same issues           following the global financial crisis (GFC).
     may do so from different perspectives, leading to a               One example is disclosure. The theory recognises
     fragmented approach. The cumulative impact of the           the importance of disclosure for investors to assess
     reforms on market efficiency could be overlooked.           risk and make their own decisions.
     The focus on fixing past problems could lead to                   The assumption is that investors (whether
     insufficient attention on the future.                       institutional or retail) have the tools to understand
         These risks can translate into inefficiencies in        what disclosure means. We saw at the institutional
     the market and increases to the cost of capital. One        level that there was widespread disclosure on how
     way to minimise these risks is to assess the reforms        credit default swaps (CDSs) and collateralised debt
     within an agreed conceptual framework.                      obligations (CDOs) and synthetic CDOs-squar
								
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