domingo, 20 de noviembre de 2011

Complejidad, innovación y la regulación de los mercados financieros

Awrey, Dan, Complexity, Innovation and the Regulation of Modern Financial Markets (August 25, 2011). Available at SSRN:
Robert Bartlett’s event study involving Ambac Financial provides a compelling illustration of how the information thicket may result in the loss of information. Ambac was and is a large, publicly-listed monoline insurance company which, prior to the GFC, was active in the business of insuring multi-sector CDOs. As a result of the confluence of (1) statutory accounting rules mandating disclosure by monoline insurers of their largest exposures, and (2) European regulatory requirements mandating disclosure of large volumes of legal and financial documentation in respect of insured CDOs, it is possible to construct a relatively complete picture of Ambac’s exposures and, accordingly, its financial health. In 2008, a number of CDOs insured by Ambac experienced multi-notch credit rating downgrades. Bartlett’s analysis of the abnormal returns surrounding the announcement of each of these downgrades revealed no significant reaction in Ambac’s stock price, short-selling data or the CDS spreads on its senior debt securities. The subsequent disclosure of these downgrades within Ambac’s quarterly earnings announcement, however, was associated with significant one-day abnormal returns. Bartlett attributes this inefficiency to the low salience of individual CDOs within Ambac’s portfolio and the logistical challenges of processing CDO disclosures. In effect, however, the density of the information thicket overwhelmed the powerful incentives possessed by market participants to seek out and exploit such informational inefficiencies. these interconnections make it more costly to identify and monitor potential sources of risk within the financial system
What is more, the sheer number of these linkages, their intricacy and their rapid evolution suggest that our ability to identify and understand them will ultimately be constrained by bounded rationality. It is perhaps not surprising, therefore, that many of these interconnections are only revealed (or their importance fully understood) at the point at which they become channels for the transmission of financial shocks.
securitization (a process whereby the cash flows associated with non-liquid assets are pooled together, restructured and sold as securities) transforms what was initially, in many instances, a bilateral relationship into a complex web involving potentially hundreds of dispersed counterparties
Who benefits from the complexity of modern financial markets?
While Schumpeter himself may not necessarily have espoused this view, it is not difficult to see how one might interpret his analysis as equating innovation – in the form of new goods, methods of production or forms of industrial organization – with progress…. however, the welfare implications of financial innovation are not nearly so straightforward… desirability of a more cautious, less value-laden understanding of financial innovation as an ongoing process of experimentation whereby new institutions, instruments, techniques and markets are (or are perceived to be) created.
No creo. Es el mismo que en los demás mercados de bienes y servicios. La diferencia está en que en los demás mercados no hay fallos que permitan que innovaciones que no generan valor pero que redistribuyen valor en beneficio del que las introduce permanezcan mucho tiempo en el mercado.
Henry Ford was apparently fond of saying that if he had asked people what they wanted, they would have said faster horses.Put another way: supply-side incentives can be extremely influential in determining the course and speed of innovation.
Why financial intermediaries innovate?
The key insight is derived from understanding that financial intermediaries possess at least three very different incentives to innovate.
First, as previously acknowledged, they innovate in response to the emergence of genuine demand within the marketplace.
Second, they often possess their own demand-side incentives stemming from, for example, the desire to mitigate the impact of various regulatory requirements. A prime example of this, …has been the use (and adaptation) of securitization techniques by banks to circumvent capital adequacy requirements. the more assets a bank could repackage and sell via securitization, the more capital it could deploy toward new investments
Third, financial intermediaries possess supply-side incentives to design and implement strategies with the intention of recreating the monopolistic conditions – usually afforded by the protection of intellectual property rights – which allow for the ongoing extraction of rents. There are at least two such strategies and, together, they help reveal the multifaceted relationship between complexity and financial innovation.
The first strategy involves artificially accelerating the pace of innovation. Financial intermediaries engage in this strategy for the purpose of achieving product differentiation – not only vis-à-vis the innovations of their competitors but, crucially, between previous generations of their own innovations. Rather, it can theoretically be premised on little more than tapping the instinctive human desire for the ‘next new thing’. The practical effect of this strategy is to reset the diffusion clock – in essence creating more(albeit shorter) monopoly-like periods – thereby enabling intermediaries to extract greater rents from their innovations. Importantly, this strategy also manifests the potential to generate what U.K. FSA Chairman Adair Turner has characterized as “socially useless” over-innovation.
La segunda estrategia “is to embrace complexity as an integral component of their business models” para que los demás no puedan replicar nuestra estrategia.. complexity can be utilized by financial intermediaries for the purpose of preventing the commoditization of an innovation”
The defining feature of this microstructure is the fact that dealers perform an explicit market-making role: structuring derivatives instruments and marketing them to clients on the basis that they are willing to take either side of the transaction These dealers then typically look to eliminate the resulting exposures by seeking out
and entering into offsetting transactions with other clients or, in many cases, other OTC derivatives dealers
Introduced in the early 1990s, plain vanilla ETFs physically replicate the reference portfolio by purchasing the underlying assets. Synthetic ETFs, in contrast, are a more recent innovation designed to replicate the reference portfolio through the use of OTC derivatives. While there exist a number of ways to structure a synthetic ETF, perhaps the most common technique involves the sponsor of the fund entering into a total return swap with a financial intermediary.There are two components – or ‘legs’ – of this swap. In the first leg, the ETF sponsor contracts with the financial intermediary to receive the total return on the reference portfolio in exchange for cash equal to the notional amount of the swap. In return, the financial intermediary transfers a portfolio of collateral to the ETF sponsor. Importantly, the collateral assets are often unrelated to those which the synthetic ETF has been designed to replicate. The second leg of the swap then involves the transfer of the total return on the collateral package back to the financial intermediary… Synthetic ETFs have thus far proven especially popular in Europe and Asia.The growing demand for these derivatives has been stoked by institutional investors in search of higher returns in less liquid fixed income and emerging markets where physical replication of a reference portfolio would almost certainly prove prohibitively expensive
Kate Judge, “Fragmentation Nodes: A Study in Financial Innovation, Complexity and Systemic Risk” (2011), Stanford L. Rev. [forthcoming] at 3, 4, 25 and 38, available at

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