Malpractice in Capital Markets: Changing the Organizational Blueprint

by Anshuman Jaswal, PhD, November 7, 2012
Industry Trends
Global

Abstract

Market manipulations in the leading global economies did not directly impact laypeople in the past, but the financial crisis has showed that this is no longer true.

In the report, Malpractice in Capital Markets: Changing the Organizational Blueprint, Celent looks at the recent market turmoil and examines the rise in the number of investigations into the dealings of investment banks and financial firms. This has generally raised a number of issues with regard to the manner in which these institutions are being run.

It was previously believed that the global financial crisis was caused in part by the repeal of the Glass-Steagall Act, and the resulting tendency on the part of large financial conglomerates to engage in high levels of speculation using complex derivatives. But the Libor-rigging case and similar instances show that there have been ongoing instances of market manipulation in the last couple of decades and that the events leading to the financial crisis were not outlying occurrences. It has also been argued that the Dodd-Frank Act and strong regulation of the financial markets are the best means available to ensure that a repeat of the crisis does not occur. But if the issues run deeper, merely depending on government regulation will not help resolve our problems.

We have to understand how the entire financial markets have been set up and whose interests they are serving. Once these matters are clearer, we have to try and change the very DNA of the markets and their constituent institutions. The focus for organizations has to be on the “service” element of the term financial services. This has been lost over the last few years.

Firms have to put checks and balances in place to encourage and incentivize healthy practices. The steps being taken by regulators in the leading markets are not sufficient in and of themselves. Due to the supervisory nature of its work, a regulator enters the scene once malpractice has been under way for some time. There needs to be much more self-regulation by organizations which goes beyond the risk mitigation that normally takes place.

“When it comes to market manipulation, we need to detach ourselves from the tactical and operational requirements to look at strategic motives and direction,” says Dr. Anshuman Jaswal, Senior Analyst with Celent’s Securities & Investments Group and author of the report. “Financial market participants have been making concerted efforts, but in many cases, these have been focused on merely fire-fighting and preparing for upcoming regulatory requirements.”

This 16-page report conducts a thought experiment in what kind of an approach could work in weeding out systemic malpractice in the financial markets.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is part of Marsh & McLennan Companies [NYSE: MMC].

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Table of Contents

Executive Summary

1

Introduction

3

Understanding Malpractice and Corruption

4

Considering the Response

7

Conclusion

9

Leveraging Celent’s Expertise

11

 

Support for Financial Institutions

11

 

Support for Vendors

11

Related Celent Research

12

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