Arbitrage is the practice of taking
advantage of a difference (usually
price difference) between two or more markets.
In order to have arbitrage opportunities,
we need to find a difference.
Regulatory Arbitrage is the practice of
taking advantage of a regulatory difference
between two or more markets.
A. Basel ii / Basel iii frameworks
B. The 8th Company Law
Directive (the European Sarbanes-Oxley)
Basel ii / Basel iii
Basel ii (and its
amendment, Basel iii) is a
mandatory framework which is full of differences (different
approaches, different deadlines, different options, different national
When we have all these different approaches and options
by design (Basel ii is proud of that), we
"flexible" countries that create opportunities, and
"non-flexible" countries (compliance
is just an obligation).
Hedge Funds select the more favorable jurisdictions, playing one
government off against another.
The "flexible" countries know that. They
have a plan, to retain or attract foreign direct investments.
hedge fund managers like shopping, especially
They try to find the friendliest regime
to do business.
The "non-flexible" countries complain.
They say that a general easing of regulations is a
"race to the bottom". And, they
continue to lose money, jobs, investments.
Basel ii is supposed to be the framework
that attempts to align economic and regulatory capital more closely to
reduce the scope for regulatory arbitrage.
At least, this is what they say.
But, you can not have so many differences
(approaches, deadlines, options and national discretions)
and the same time to say that you try to
reduce the scope of regulatory arbitrage!!!
providing at least three alternative
capital calculation methods, Basel II creates differences that
do not exist in Basel I.
The treatment of non-investment-grade
credits under the standardized approach is so different from the
treatment under the foundation or advanced internal ratings based
8th Company Law Directive (the European Sarbanes-Oxley)
After the passage of the
US Sarbanes-Oxley Act in 2002, US
and non-US companies listed in a US stock exchange have the difficult
task to comply with the Sarbanes-Oxley Act.
After the passage of the European Union's
8th Company Law Directive on Statutory Audit (Directive
2006/43/EC), European and non-European companies listed in any country
of the EU have to comply with the 8th company law directive.
The 8th directive is considered the European
post Sarbanes-Oxley regulatory retaliation.
And, like in the
US SOX, there are extremely important extraterritorial consequences
The Offshore Financial Centers (OFCs) for example
enact legislation to prove that they have an "equivalent level of
regulation", to protect their auditors that audit offshore companies
with EU listings from being subject to a tough European oversight
Otherwise, auditors and audit firms from "third countries"
have to be registered in the EU and to be subject to oversight,
quality assurance and sanctions.
Under Article 45(1) of Directive 2006/43/EC
authorities of the Member States are required to register
third-country auditors and audit entities that conduct a statutory
audit on certain companies incorporated outwith the Community whose
transferable securities are admitted to trading on a market
regulated within the Community.
Article 45(3) of Directive 2006/43/EC requires Member States to
subject such registered third-country auditors and audit entities to
their systems of oversight, quality assurance systems and systems of
investigations and penalties.
The European Commission is required
under Article 46(2) of Directive 2006/43/EC to assess the
equivalence of third country oversight, quality assurance and
investigation and penalties systems in cooperation with Member
States and make a determine on it.
If those systems are
recognised as equivalent,
Member States may exempt third country auditors and audit entities
from requirements of Article 45 of the Directive on the basis of
Basel iii and
is very interesting to monitor the regulatory differences that
will definitely lead to regulatory arbitrage.
time, Basel iii looks like a menu approach, and counties will be
able to do more or less, sooner or later.
Basel iii will
again become something like a dream, and the national
interpretation of Basel iii will become the law, which is going to
be different from country to country.
Some important issues
1. The definition of the Tier 1
has a huge impact for healthy (under Basel 2) banks. For years,
some banks rely on types of hybrid
equity that may now not meet the new Basel iii requirements.
For example, there is a form of non-voting bank capital in
Germany, known as "silent
participations”, which do not
absorb losses as long as a bank is still in business.
this reason the Basel Committee excludes them from banks' Tier 1
capital, which could force German
banks to raise billions, as a
quarter to a third of the capital reserves of German savings
banks, cooperative banks, private banks and landesbanks come in
the form of silent participations. We speak about 50 billion
If banks are unable to raise equity on capital
markets, it could lead to a shortfall in loans to companies and
municipalities in Germany of 300-400 billion Euros.
Investors will be scared.
If Tier 1 capital is less than
9%, banks will not be allowed to pay
out dividends to shareholders.
In good times, banks have to allocate another 3%. It
simply means that in good times banks need Tier 1 capital of 12%
in order to be able to pay dividends.
If we add 4% Tier 2
capital, we reach an interesting number: 16% (6 percent Tier 1,
plus 4 percent Tier 2, plus 3 percent conservation buffer, plus 3
percent anticyclical buffer).
we have a more (very strict) definition of
Tier 1 capital. Hybrids are out.
Hedge funds could plan to short certain banks.
try to understand how much capital banks may need to raise in
order to be able to pay dividends.
The Basel iii
regulatory changes that require banks to hold more capital for
risky assets will hit some banks that have large investment
banking divisions especially hard.
And, this is
just one area or regulatory arbitrage
opportunities. If we add the differences in SIFIs, the banks that
will be forced to sell insurance and securities subsidiaries...
One of our Regulatory Arbitrage
presentations (233 slides) is part of the Certified Hedge Fund
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Certified Hedge Fund Compliance
The Cost: US$ 797
What is included
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official presentations we use in our
instructor-led classes (5387 slides)
Compliance for Hedge Funds Around the World
- 710 slides
The Sarbanes Oxley Act: What you need to know
- 410 slides
Understanding the Frameworks:
COSO and COSO ERM - 110 slides
Understanding the Frameworks: COBIT - 272 slides
The Basel ii Accord and the new
international standards in credit, market and operational risk Part
- 354 slides
The Basel ii Accord and the new international standards in
credit, market and operational risk Part B- 448 slides
Understanding the European Sarbanes Oxley -
the 8th Company Law Directive, the Market Abuse Directive and the
Transparency Directive of the
European Union- 370 slides
The Markets in Financial Instruments Directive (MiFID) - the
European Union's harmonized regulatory regime for investment
services across the 30 member states- 557 slides
Undertakings for Collective Investment in Transferable Securities
(UCITS III / UCITS IV): What is important- 327 slides
Regulatory Arbitrage after the Basel ii framework and the 8th
Company Law Directive of the European Union- 233 slides
Conglomerates Directive of the European Union- 183 slides
The Dodd Frank
Act and the major changes in corporate governance and risk
management- 976 slides
Up to 3 Online Exams
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If you fail, you must
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The Dodd Frank Act and the new
Risk Management Standards (976
slides, A13 above)
The US Dodd-Frank Wall Street Reform and Consumer Protection
Act is the most significant piece of legislation concerning the
financial services industry in about 80 years.
What does it mean for
risk and compliance management professionals? It means new
challenges, new jobs, new careers, new opportunities.
The bill establishes new risk management and corporate
governance principles, sets up an early warning system to protect
the economy from future threats, and brings more transparency and
It also amends important sections of the Sarbanes
For example, it significantly expands whistleblower
protections under the Sarbanes Oxley Act and creates additional
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