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How Does Regulation Affect Global Markets?

Regulation on the global markets

There are many regulations and jurisdictions in global financial and trade markets. The Financial Times defines financial regulation as “laws and rules that govern what financial institutions such as banks, brokers and investment companies can do.” Whether they are the result of collective decisions or authoritarian enforcement, regulations are controversial among conflicting interests.

Consumer protection and fraud prevention regulations, for example, are well-intentioned but sometimes shift the burden of responsibility from one party to another. An example is the Bank Secrecy Act, an IRS regulation that mandates disclosure from financial institutions for deposits over $10,000. While the intention is to deter illegal activity, including money laundering and funding terrorism, compliance is the responsibility of the financial institutions, which face significant fines and penalties if they fail to do so. This demonstrates why a new bank might avoid establishing operations in the United States, potentially shifting funds to another country instead.

Regulations

The world economy unfolds against a backdrop of legal agreements, transparency expectations, and policy enforcement. Treaties protect the interests of international businesses and the global exchange of capital. Financial regulations formalize the processes, limitations and controls of individual countries and collectives of countries, such as the European Union or the International Monetary Fund.

Stabilizing the marketplace and creating rules for all parties to follow requires finesse. Emerging markets, political conflicts and changes in economic policies can all undermine the delicate balance of global financial markets.

Burdens and Benefits

New regulations are seldom welcome news for the entities obligated to abide by them. There are, however, entities that benefit from regulations. Individuals and companies protected by trade statutes, recipients of tax credits, and those for whom regulation creates a level playing field all look to governments and taxing authorities for enforcement.

Treaties can settle disputes and enforce trade and property rights. However, treaties (and their regulations) are often valuable and enforceable only until the status quo changes. The UK’s exit from the European Union is a high-profile example of how even developed countries can cause radical changes in the marketplace. The anticipated shifts in the financial and economic markets as a result of this decision had an immediate effect on markets around the world. Banks, investment managers and stock exchanges took notice and immediately began calculating how the UK’s exit would affect their clients and investments.

Global Financial Compliance

It is the fiduciary duty of corporate officers to act in the best interest of their owners and shareholders. Along with managing assets and liabilities, they must ensure that the companies they serve comply with financial regulations in every jurisdiction where they operate — the cost of noncompliance can be significant. On the global front, specific agencies audit and enforce regulations, such as international monetary policies, foreign exchange rates and controls, and legal responsibilities.

The Pieces and the Future

The United States Federal Reserve system is just one of many entities involved in U.S. financial markets and capital exchange. Lowering interest rates can spur lending and investment while increasing rates can help reign in excessive financial activity. Safeguarding public and private funds from fraudulent activities (like money laundering and insurance fraud) and enforcing accounting standards are additional examples of regulatory oversight.

Financial regulations are a complex web of ever-changing policies and laws. Market entities try to balance foreign policy with the global economy. Each country and economic group has its own objectives and obligations. Policymakers face the challenge of creating laws and regulations that fit current and future economic needs while balancing supplies of money and liquidity. Coordinated effort, consistent oversight, and global consideration all create an international marketplace in constant flux.

Learn more about the Texas A&M-Corpus Christi online MBA in Finance program.


Sources:

Financial Times: Definition of Financial Regulation

TDLR: Programs Licensed and Regulated by TDLR

PwC: PwC Report Reviews State of Global Financial Market Liquidity

Fraud Fighter: Bank Secrecy Act – The $10,000 Rule


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