Strengthening Regulation on the Securities Market, Especially the OTC Market

The organizational architecture for investment bank risk management in the United States consists of the audit committee, the implementation and management committee, the risk-monitoring committee, the risk policy team, the business units, the risk-management committee, and various management committees of the company. During the international financial crisis, however, these investment bank risk-management organizations failed to play a sufficient role in managing and controlling risks, showing signs of weakness. Therefore, regulation should be strengthened on the securities market, and in OTC transactions in particular. Off-balance-sheet business should be subjected to the same regulation that is applied to on-balance-sheet business to reduce regulatory arbitrage and to better motivate risk management. With constant development of integrated operation in the Chinese securities industry, banking industry, and insurance industry, cross-institution and cross-market hybrid financial products are being developed. They are accompanied by increasingly interwoven, interpenetrated, and integrated business, which calls for better financial regulation.

For that reason, the reform of the financial regulatory system should be strengthened. Financial regulatory coordination mechanisms should be enhanced. Information exchange and sharing between different regulatory bodies should be improved with enhanced regulatory cooperation and coordination for collaborative regulation. The regulatory hierarchy should be adjusted and the regulatory jurisdiction of each regulatory body should be clearly defined to avoid repeated regulation. Universal regulatory standards should be set to minimize regulatory conflicts and fill up regulatory vacuums or blind areas. A transition should be made from the original institutional regulation to function-based and objective-based regulation. An umbrella-shaped regulatory system should be put in place. Favorable conditions should be created to reform the "big ministry" financial regulatory system and implement integrated financial regulation. Measures to consider include: improving the financial regulatory joint meeting mechanism, setting up a multilateral emergency negotiation system, setting up a financial holding group regulatory coordination system with centralized and decentralized components, and building a statistics information-monitoring system compatible with the financial regulatory coordination mechanism.

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