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A blog on financial markets and their regulation
On may versus must and suits versus geeks
On Monday, the Basel Committee on Banking Supervision published its Regulatory Consistency Assessment Programme (RCAP) Assessment of India’s implementation of Basel III risk-based capital regulations. While the RCAP Assessment Team assessed India as compliant with the minimum Basel capital standards, they had a problem with the Indian use of the word “may” where the rest of the world uses “must”:
The team identified an overarching issue regarding the use of the word “may” in India’s regulatory documents for implementing binding minimum requirements. The team considers linguistic clarity of overarching importance, and would recommend the Indian authorities to use the word “must” in line with international practice. More generally, authorities should seek to ensure that local regulatory documents can be unambiguously understood even in an international context, in particular where these apply to internationally active banks. The issue has been listed for further reflection by the Basel Committee. As implementation of Basel standards progresses, increased attention to linguistic clarity seems imperative for a consistent and harmonised transposition of Basel standards across the member jurisdiction.
Section 2.7 lists over a dozen instances of such usage of the word “may”. For example:
Basel III paragraph 149 states that banks “must” ensure that their CCCB requirements are calculated and publicly disclosed with at least the same frequency as their minimum capital requirements. The RBI guidelines state that CCCB requirements “may” be disclosed at table DF-11 of Annex 18 as indicated in the Basel III Master Circular.
Ultimately, the RCAP Assessment Team adopted a pragmatic approach of reporting this issue as an observation rather than a finding. They were no doubt swayed by the fact that:
Senior representatives of several Indian banks unequivocally confirmed to the team during the on-site discussions that there is no doubt that the intended meaning of “may” in Indian banking regulations is “shall” or “must” (except where qualified by the phrase “may, at the discretion of” or similar terms).
The Indian response to the RCAP Assessment argues that “may” is perfectly appropriate in the Indian context.
RBI strongly believes that communication, including regulatory communications, in order to be effective, must necessarily follow the linguistics and social characteristics of the language used in the region (Indian English in this case), which is rooted in the traditions and customs of the jurisdiction concerned. What therefore matters is how the regulatory communications have been understood and interpreted by the regulated entities. Specific to India, the use of word “may” in regulations is understood contextually and construed as binding where there is no qualifying text to convey optionality. We are happy that the Assessment Team has appreciated this point.
I tend to look at this whole linguistic analysis in terms of the suits versus geeks divide. It is true that in Indian banking, most of the suits would agree that when RBI says “may” it means “must”. But increasingly in modern finance, the suits do not matter as much as the geeks. In fact, humans matter less than the computers and the algorithms that they execute. I like to joke that in modern finance the humans get to decide the interesting things like when to have a tea break, while the computers decide the important things like when to buy and sell.
For any geek worth her salt, the bible on the subject of “may” and “must” is RFC 2119 which states that “must” means that the item is an absolute requirement; “should” means that there may exist valid reasons in particular circumstances to ignore a particular item; “may” means that an item is truly optional. I will let Arnold Kling have the last word: “Suits with low geek quotients are dangerous”.