So while the global financial crisis is still making its impact felt, what does the future hold for financial markets? What will the environment for these global capital markets look like? Let's start with the regulatory environment, with the regulators taking a much closer look at what really happens on these global capital markets. Governments, markets, markets themselves, and banking regulators continue to review regulation in light of what happened during the global financial crisis. And that episode that we discussed earlier, Enron. Two major regulatory acts stand out, 2002 the Sarbanes-Oxley Act, and we've discussed that in some detail. Followed in 2010 in the aftermath of the global financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act. Implementation of that later act meant that regulation introduced a set of rules to prevent a similar crisis. Europe followed suit and introduced similar regulatory reforms. But all these regulatory reforms imposed costs, costs that were considerable and were passed on to the users of financial services of the financial system. The fact that the rules, the new rules of regulation were still market specific, nation specific, also meant that harmonization of those rules. Let's call it a one size fits all regulation, became all that more difficult to achieve. So, here's what happened with the regulated. Much more stringent capital requirements for financial institutions, the prohibition of proprietary trading by these financial institutions kinda disentangling their integration with financial markets. Transparency disclosure requirements, and a whole heap of other regulatory costs would ultimately be passed on to the borrowers, the corporations for us, and also had the impact of reducing the available funding. By imposing higher capital requirements, less money is available to invest in positive net present value projects. The Dodd-Frank Act also brings regulation to what was harder to, unregulated derivatives markets. It brought these over-the-counter derivatives markets into line with the exchanges with the derivatives exchanges. For example, in the Credit Default Swap area, one of the areas which was significantly impacted by the global financial crisis. These markets, from now on, also have to be regulated by either the SEC or the CFTC, the Commodities Futures and Trading Commission. Market participants, perhaps not surprisingly, would have argued that this was an overreaction to a crisis, which was if anything modest in comparison with earlier historical crises. Is that really the case? Well, while the market reaction might have been limited, the impact on nation's economies has been severe, and still is. So, countries and their monetary authorities did want to take significant action. At first, they did not seem to be in full control of events. With all series of government bail-outs being mostly reactive to events unfolding. The notion of too big to fail financial institutions proved a really compelling argument for governments for monetary authorities to intervene in their nations' banks. But they did that at a price, and the price of this what we called implicit deposit insurance protecting small depositors was causing moral hazard. Not requiring investors, depositors to do their homework, to check out how risky these financial institutions really were. Because they were protected by government guarantees anyways. It also caused to an extent, at first, selection. And we've seen some of that in light of the market share attempts by banks into the subprime markets. And other unintended impacts of the too big to fail premise was that it had the impact of protecting and monopolizing the big banks at the expense of smaller financial institutions. Also making it that much more difficult for new financial institutions to try and access the financial system. Ultimately, it did not address a core problem. Banks had become increasingly inter-connected with global capital markets, and debt is going to be very difficult to unwind. So that was the national response. What about an international response? After all, we're talking about globally operating capital markets crossing borders. The G20, the 20 major world's economies meet regularly and have discussed the impact of the global financial crisis and what to do about it. The G20 has proposed tougher global coordination of regulatory regimes to address systemic risk that would affect all of their economies. They passed that mandate on to the International Monetary Fund. The Monetary Fund established a Global Financial Stability Board, and the Global Financial Stability Board picked broad categories of focus. They then empowered, for example, the Bank for International Settlements to make changes to banking supervisions worldwide. Similar instructions from the International Monetary Fund went to the International Organization of Securities Commissions, having a direct impact on equity market and debt market regulation. These institutions, the BIS and the IOSCO, impose international standards and principles. And these international standards and principles were then passed on to the national regulators to take action on. So we've discussed the regulated, but what about the under-regulated? Well, deregulation, liberalization, and technological advances that have truly reshaped capital markets as we know them from the late 1980s onwards, have linked the world's capital markets together, making them globally accessible. From Australia, it is just as easy to access capital markets in Russia as it is for a Russian investor to access capital markets in Bolivia. Another feature of the deregulation and technological advances that we've seen in the last decade or so, is the emergence of online trading platforms. It has become increasingly easy to access retail capital markets, but likewise for corporations, it's become much easier to access wholesale platforms. Online risk assessment, no longer is it necessary to engage in a lengthy risk assessment procedure, risk assessment can now be done online. New trading platforms, including high frequency trading and algorithmic trading programs have entered the markets. We've discussed that briefly, when we touched on risk pollution, introducing new levels of risk where speculators are trading for different purposes than just assuming the risk from, say, corporations. We've seen the integration of equity debt foreign exchange and commodity markets, and we've seen how that is reflected in co-moving share prices with commodity price, or share prices and bond yields. We've seen new markets emerge for assets that were previously just deemed to be too illiquid to organize trading for on an exchange. And lastly, we've seen for corporations the need to release public news, material news, real-time. And from the under regulated, we move to the truly unregulated markets where regulators are really struggling to get a good grasp of what is going on here, and how this is affecting economies. And introduces systemic risks. For example, the Peer-to-Peer lending operators, where Internet platforms are created to provide direct financing without having to incur formal market costs. But these Peer-to-Peer platforms are also not recognized as markets, and are therefore escaping regulatory oversight. Maybe that is unfair competition. Crowd-funding, similar arguments apply where Crowd-funding uses over-the-counter platforms for specific project funding. Again, escaping regulatory oversight. Microfinance, providing loans to the truly unbanked across the world, which creates an informal banking network. Lastly, and very importantly, Shadow banking. Shadow banking being defined as non-bank financial intermediaries providing a whole range of financial services, which are in fact, very similar to what commercial banks provide. But with much cheaper access to funding and a lot less regulatory impositions, all of these unregulated financial innovations are causing regulators trouble. Are causing regulators to review the scope of regulation, and the extent of regulation. So, what are the implications for our corporations? While these new innovations in global capital markets are certainly providing new sources, new types of financing which looks attractive. It opens up the opportunity for these corporations to expand their business operations, to invest in these all-important net positive present value projects. But the corporations have to wonder, are these sources in fact less stable, and if they disappear, how does the corporation refinance? Will they in fact, disperse liquidity by opening up new markets? Are they actually cannibalizing existing markets? Are they decreasing transparency in markets? It looks like the market is becoming more transparent, but by increasing the number of trading platforms or trading sources, does it actually become harder to understand what is going on? What is the price for less regulation? Does that mean that corporations are exposed to the risk of market failure more severely? And lastly, is the reduction in regulatory cost for those new platforms in fact just offset by a higher risk premium, thereby negating that impact. Just two observations to finish off. Global corporations are becoming their own financial operators. They create their own internal markets, large commodity producers, like Rio Tinto for example, would operate a foreign exchange, its own internal foreign exchange trading desk. CFOs need to be increasingly sophisticated to be aware of those opportunities. And for the Boards of Directors, it becomes increasingly important to invest in their understanding of the risks involved in these new sources and opportunities for financing.
