portfolio risk management

Compliance Regulations: A Solution to the Great Depression

With the massive closure of businesses that followed the great economic depression in 2007, new laws and compliance regulations where formulated to facilitate the losses as well as halt the progression of the financial crisis. A good example is the Dodd Frank act that was officially integrated into the Federal Law of the USA. The act aims to protect the interest of the investors providing them new options when trading securities. Dodd Frank also aims to protect the regular tax payer from abusive policies imposed by private financial institutions such as banks, lending companies and other financial intermediaries. It also aims to stop “too big to fail” although until, this issue has still yet to be fully addressed. These compliance regulations also aim to improve the transparency of all financial processes and improve its accountability.

A more recent compliance regulations initiative is the completion and implementation of the IFRS 9 Financial Instruments which is IASB’s solution to prevent another financial crisis to occur and to address the aftermath of the most recent economic depression. The new regulation introduces a new way of classifying financial assets by determining its cash flow characteristics as well as the type of business model that houses it. This simplifies old procedures in classifying assets thus simplifying the whole internal process. This new policy also aims to a more timely recognition of possible credit losses.  The new compliance regulations also targets improvement in risk management to help formulate precautions and quick solutions to stop progressive risks.

A new international body called G20 was also formed to address the effects of the great economic depression as well as prevent its re-occurrence by formulating new compliance regulations. The convention is composed of 20 countries whose total economic weight comprises eighty percent of world trade. One of their compliance regulations is to introduce clearing houses for over the counter derivatives to promote transparency and better accountability. This will help a balance flow of commodities and assets in the global market promoting trade and minimizing fraudulent activities. However, this move has yet to see its full implementation since there are many underlying issues that need to be addressed in order to entice traders to conform to these new derivatives standards.

In the end, compliance regulations are not perfect. There will always be flaws that can be taken advantage by opportunistic investors. It is your duty as a responsible investor to choose between a high risk high return trading or to opt for low returns but lesser risk for losses.