Karma virumque cano...

The Future of United States Securities Regulation in an Age of Technological Uncertainty

The evolution of information technology will determine the future structure of the world's financial markets. A nuanced appreciation of technology and its implications for financial markets is herefore essential to the design of a successful, modern securities regulation regime. Although the SEC currently ranks as among the most successful federal agencies in responding to changes in information technology, its ability to stay abreast of new developments is open to question. The agency appears to lack an adequate number of staff that are adept in more advanced implications of information technology. It also has no articulated technology strategy.

This paper expands on the need to develop a technology strategy and provides five distinct examples of initiatives that could emerge from a more affirmative approach to information technology. These examples suggest: (1) a software-based open architecture redesign of EDGAR; (2) a more aggressive role for the SEC in the definition of financial XML and its integration into the disclosure regime; (3) the use of an open API structure to resolve market fragmentation issues generated by the emergence of ECNs and other novel marketplaces; (4) the application of Internet technology to provide individualized trading risk measures that could be responsive to the agency's concerns regarding suitability; and (5) the application of on-line authentication techniques to reduce the risk of "counterfeit" disclosures, such as those which adversely affected Emulex's and Pairgain's stock prices.

• The identification and promotion of relevant standards in the financial information industry is very consistent with FISD’s role as a neutral forum for the industry.
• Relevant standards include, but are not limited to, transmission protocols, data models, database structures and elements, identifiers, and classification structures
• Standards are a form of cooperation among the members of an industry – very similar to many other FISD activities and objectives


• While members of the industry are competitors, the adoption of standards typically will not significantly undermine the commercial position of any firm vis-à-vis its competitors.
• FISD’s role in setting and adopting standards


• Monitor standards environment, identify and educate the membership on emerging issues and needs


• Manage the development of FISD member consensus positions on standards-related issues and promote those positions in the appropriate forums


• Must have member consensus – may be difficult


• Facilitate FISD member participation in the standard setting processes, directly and indirectly through the FISD staff


• FISD staff can put in the leg work that members may not be able to commit.


• Individual members’ opinions can be represented even when there is no “FISD Consensus”


• Members can leverage FISD to learn about the latest developments in standard-setting processes and get their views exposed in the appropriate forums.


• In certain instances, a member may participate in standards processes directly as FISD’s representative. This needs to be approved by the committee participating in this standard or the SPA-AC.


• Any member serving in such capacity would need to be willing to meet certain requirements:


• Clear delineation of personal/corporate positions from FISD-consensus positions


• Regular, impartial communication with other interested members, facilitated by FISD .staff, regarding the activities within the standards process.


• Member responsible for their own travel and hotel costs.


• Provide knowledgeable and neutral staff resources for standards development within non-FISD standards organizations that could not be provided by any one member


• Standards body if necessary and feasible


• Existing standards and standards bodies may not be meeting a specific need of FISD membership


• In general, FISD should not seek to be a standards body or a Maintenance Agency


• Resources (both at the FISD and SIIA) and competencies not ideal for actively managing a standard


• Resources drained away from other FISD activities


• Conflicts of interest – FISD agenda may tend to favor the standard that it manages, or be perceived as such


• Prior to taking on any Standards Body responsibilities, FISD membership must have an explicit consensus (as voiced through the FISD Executive Committee) that it is necessary, appropriate and feasible for FISD to serve as a Standards Body. There should be member consensus that…


• FISD has the long-term resources to fully support the standard.


• Consideration should be given to both expected costs and revenues that might be associated with management of the standard


• Alternatively, there should be an explicit termination date after which support for the standard would be either: (1) spun off as a stand-alone organization, (2) discontinued, or (3) transferred to another organization.


• There is no other body willing and qualified to manage the standard


• There is a critical industry need for the standard


• Management of the standard does not conflict with any other key FISD roles and responsibilities

Calibrating CAT bonds for Mexican earthquakes
Wolfgang Karl Hardle, Brenda Lopez Cabrera
CASE - Center for Applied Statistics and Economics
Humboldt-Universitat zu Berlin

The study of natural catastrophe models plays an important role in the prevention and mitigation of disasters. After the occurrence of a natural disaster, the reconstruction can be financed with catastrophe bonds (CAT bonds) or reinsurance. This paper examines the calibration of a real parametric CAT bond for earthquakes that was sponsored by the Mexican government. The calibration of the CAT bond is based on the estimation of the intensity rate that describes the earthquake process from the two sides of the contract, the reinsurance and the capital markets, and from the historical data. The results demonstrate that, under specific conditions, the financial strategy of the government, a mix of reinsurance and CAT bond, is optimal in the sense that it provides coverage of USD 450 million for a lower cost than the reinsurance itself. Since other variables can affect the value of the losses caused by earthquakes, e.g. magnitude, depth, city impact, etc., we also derive the price of a hypothetical modeled-index (zero) coupon CAT bond for earthquakes, which is based on a compound doubly stochastic Poisson pricing methodology. In essence, this hybrid trigger combines modeled loss and index trigger types, trying to reduce basis risk borne by the sponsor while still preserving a non-indemnity trigger mechanism. Our results indicate that the (zero) coupon CAT bond price increases as the threshold level increases, but decreases as the expiration time increases. Due to the quality of the data, the results show that the expected loss is considerably more important for the valuation of the CAT bond than the entire distribution of losses.

A History of Interest Rates
Sidney Homer
Looks at interest rate trends throughout history, describes the world market, and discusses inflation-indexed loans, real interest rates, and federal debt.

Venture Shares of the Dutch East India Company
Larry Neal
University of Illinois at Urbana-Champaign
Research Associate, NBER

ProShares Ultra ETFs Benefit From Market Volatility

As volatility has increased over the past months, the ProShares Ultra ETFs have seen a dramatic increase in average dollar liquidity.  There are exactly 50 of these leveraged instruments at the moment, and they are listed below, sorted by age.

I've taken the product of the close and the volume for the 46 funds that have traded at least 150 sessions and averaged their daily cross-section.  The following is a chart of this average dollar liquidity over the past  150 sessions in blue, with a 20-session moving average in red.  The trend quite clearly indicates that not all market volatility is bad for ETFs.