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Rethinking Regulation in the Fintech Age

By Andrew Douglas, Managing Director, Government Relations (EMEA and APAC), DTCC | April 27, 2018

Rethinking Regulation in the Fintech Age
Andrew Douglas, Managing Director, Government Relations (EMEA and APAC), DTCC

New fintech innovations have the potential to revolutionize financial services and change how many parts of the industry operate. These innovations should, however, be carried out in collaboration with key industry players, including policymakers, to ensure that fintech innovation meets the needs of the marketplace in a manner that does not increase risk in the global financial system.

Currently, regulators and policymakers at a global level, such as the Financial Stability Board (FSB) and the International Organisation of Securities Commissions (IOSCO), are consulting with the industry to gain a better understanding of innovative technologies such as distributed ledgers (DLT), cloud computing, robotics, artificial intelligence (AI) and big data. We already know, for example, that many firms are exploring opportunities to improve certain inefficient post-trade processes and enhance the functioning of financial market infrastructures. These advances have the potential to improve a firm’s risk management capabilities, which, by extension, enhance the safety and stability of the global financial system. Indeed, regulators are consulting with the industry and revising existing regulations to account for these technological innovations.

For example, as discussed at DTCC’s most recent European Client Forum, the French Treasury has updated rules to authorize the use of DLT for securities that are not traded through a central securities depository (CSD) and a securities settlement system. Among the many instruments covered by the rules are negotiable debt securities; the units or shares in collective investment undertakings; equity securities issued by joint stock companies; and debt securities that are not traded via a negotiating platform.

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This straightforward update, which delivers certainty over the ownership of these instruments, created one of the first secured legal frameworks governing the use of DLT in Europe without altering the regulator’s responsibilities. If it is successful, the French authorities are likely to encourage similar arrangements to be rolled-out on a Europe-wide basis.

Other regulators such as the UK Financial Conduct Authority (FCA)’s Project Innovate and Innovation Hub, and Singapore’s FinTech Innovation Lab have created ‘regulatory sandboxes’ to explore the development and application of fintech which enable fintech companies to experiment with financial technology in a safe environment.

"This balance between promoting innovation and safeguarding financial stability is critically important given the speed with which some of these emerging initiatives are being adopted."

More recently, the US Commodity Futures Trading Commission (CFTC) launched LabCFTC, which is the focal point of CFTC fintech policy consideration and development and is undertaken through engagement and dialogue with policy makers, supervisors and other key stakeholders. In launching LabCFTC, Chairman Giancarlo stated that rules need to support technological experimentation, advancement and innovation, but they must not take precedence over important policy objectives such as risk mitigation, investor protection, market resiliency and transparency. Accordingly, LabCFTC is intended to provide greater regulatory certainly that encourages fintech innovation to improve the quality, resiliency and competitiveness of markets, and identify and use emerging technologies that can enable the CFTC to carry out its mission more effectively and efficiently in the digital world.

This balance between promoting innovation and safeguarding financial stability is critically important given the speed with which some of these emerging initiatives are being adopted. For example, there has been no shortage of accounts calling into question the legitimacy of initial coin offerings (ICOs) and fears over attempts by some to defraud those trading in the crypto currency markets. From France’s Autorité des marchés financiers (AMF)’s announcement that “cash-settled cryptocurrency contracts” are officially derivatives to the Securities and Exchange Commission (SEC)’s recently announced 2018 examination priorities, which will focus on ICOs and crypto currencies, it has been encouraging to see that globally policymakers and regulators are giving increased attention to these areas.

The smooth functioning of the global financial markets is dependent upon the trust and faith that the public and end-investors have in the system. To ensure that new fintech innovations instil and maintain that confidence, policymakers, regulators and the industry must work collaboratively to understand technological developments, ensure continued safety and soundness, and explain the benefits to end-investors. The more the financial industry shares information and knowledge, the easier the path will be to fostering innovation and protecting market integrity.

Article first appeared in Börsen-Zeitung on April 17, 2018.