A National Systemic Risk Clearinghouse?

Abstract

In December 2011, in Reference re Securities Act, the Supreme Court of Canada dashed the Canadian federal government’s hopes of being able to create a federal securities regulator. Instead, it left the constitutional jurisdiction over “day-to-day operations of the securities markets” with the provinces and allocated to the federal government responsibility for just two things: data collection, and the management of systemic risk. Our claim in this essay is that the Reference can be understood as an invitation to create a meaningful and ambitious national systemic risk regulator for the securities markets. The essay points to five recent examples (the use of derivatives by Canadian issuers; LTCM and hedge fund activity; the Asset-Backed Commercial Paper crisis in Canada; the 2010 Flash Crash and high frequency trading; and money market mutual funds) to argue that the day-to-day operations of issuers, registrants, and regulators in the capital markets are constitutive of, and inextricable from, systemic risk. Regulating systemic risk therefore requires some degree of oversight of the underlying activities, plus deep information channels into local markets. In allocating data collection responsibilities to the federal government, the Reference is giving it a potentially significant tool. The Reference opens the possibility that the federal government can create not an overlapping fourteenth securities regulator, but an active “clearinghouse” regulatory body that sets broad goals and regulatory requirements, while leaving detailed implementation of regulation to the provinces.

Keywords: systemic risk, data collection, securities regulation, Canada, clearinghouse, derivatives, hedge funds, asset backed commercial paper, Flash Crash, high frequency trading, money market mutual funds