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.

Posted at 8:32 pm IST on Mon, 9 Nov 2009         permanent link

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