Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

SEC Division of Risk, Strategy, and Financial Innovation

Back in September, the SEC created a
new division of Risk, Strategy, and Financial Innovation and appointed
a well respected law professor, Henry T C Hu, to head it. Hu has been
very active in writing about regulation and financial innovation. For
example, twenty years ago he wrote a hundred page paper about the
regulatory challenges of regulating the swap market arguing that the
Basel framework would be ineffective in dealing with anything beyond
the most plain vanilla swaps. He concluded that “the
BIS Accord’s reliance on legalistic solutions – rigid,
classification-based rules administered and maintained by government
regulators – is reflective of a simpler, more static financial era.
The process of financial innovation is now far too institutionalized
and complex to be so confined. ”

Hu’s appointment was widely welcomed at the time, but it was
clear that the success of the new division would depend on the people
that Hu is able to hire. On this score, the news last week was good. The
division announced
three new hires with diverse backgrounds all relevant to the tasks
that the division has to perform. The best known was Richard
Bookstaber, the author of the excellent book “A Demon of Our Own
Design: Markets, Hedge Funds, and the Perils of Financial
Innovation” in which he describes his experience running
firm-wide risk management at Salomon Brothers and at other firms.

Clearly, the division will soon have the talent and experience to
perform its mandate: “identifying new developments and
trends in financial markets and systemic risk; … [and] making
recommendations as to how these new developments and trends affect the
Commission’s regulatory activities.” The open question is
whether the rest of the SEC can be reformed adequately to take
advantage of this.

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