Financial markets have assumed a new dominance in modern economic, political, commercial, social and cultural organisations. Most modern economies are market-based and market-driven. Markets provide a number of key services without which almost all economic, commercial and consumer interaction would be impossible. This applies with regard to everything from purchasing a cup of coffee, a computer or a car, copyright, a company or a country.

Financial markets have had a long but varied history. It is one of profit, advantage and benefit as well as disadvantage, crisis and loss. Markets can generate substantial earnings although they are naturally cyclic and volatile and inherently unstable with a tendency or propensity to crisis and collapse.

The new century has marked a new phase in financial market evolution. A new financial capitalism has been created. This replaces earlier historical merchant, industrial, managerial and global capitalism. Whether the new financial capitalism can make up for the deficiencies and disadvantage of earlier capital models and how long it can survive without correction and replacement remains to be seen. The purpose of this essay is to consider some of the key issues and challenges that arise in this regard.

1. FINANCIAL HISTORY

Financial history can be considered in terms of the origins of money, banking, international finance, the international finance system and capital markets more generally. Agricultural produce including specifically grain was often used for exchange purposes such as in Egypt.

(1) Money

Some form of barter has always been available even in the most primitive of societies. More complex forms of barter in the form of counter trade still exist. Chinese coinage dates from between the 12th and 10th centuries and European coinage from the 7th century BC. The Greek city-states had their own currencies until silver coinage was made obligatory in the 5th century.

(2) Banking

Banking in the form of deposit or the safekeeping of valuables can be considered to date from the Sumerians and Babylonians in the 2nd and 3rd centuries BC. Items of value including metals, livestock, tools or grain were kept in the temples or royal palaces with transferable receipts being used later. Wealthy families could also provide custody services using their strong rooms with standard terms and procedures being used by 1800 BC in Babylonia. Grain warehouses were in standard use in Egypt with sophisticated credit and accounts systems being developed to facilitate the transfer of value and payment. Early Greek moneychangers (trapezitai) developed exchange, deposit and credit facilities either on their own account or as brokers and using real and personal property as collateral. These practices were continued by the Roman argentarii until the collapse of the Roman Empire.

(3) International Banking

Early account and clearing systems date from the Great Fairs across Europe during the 12th and 13th centuries. Merchants kept their own accounts with settlement being effected on the close of their fair. Payment could either be made in cash or through early forms of bills of exchange (with merchants issuing written directions to their borrowers to pay their creditors). Early double-entry bookkeeping was also used by the Knights Templar ( ) who also developed across border transfer mechanisms with receipts issued by any temple being capable of encashment at any other temple. The Order created the first international banking network.

Certain trade merchants increasingly specialised in the provision of exchange, deposit and credit facilities for other counter parties with the growth of ‘merchant banking’ initially in the Italian towns of Siena, Lucca and Florence and then Venice and Genoa and later in The Netherlands, Germany and England. The term ‘banca’ referred to the bench on which the moneychangers or merchant bankers would sit. The first public clearing bank was the Casa de San Giorgio in Genoa in 1407 although public debt had been issued in Venice in the 1300s and Florence in the mid-1300s with the Monte Commune. The Monte de Paschi was set up in Siena in 1472.

English banking is considered to have emerged out of the deposit and receipt facilities provided by goldsmiths or jewellers and lapidaries and scriveners or notaries. Early paper money included the repayment orders or ‘tallies’ issued by the Treasury which became assignable in 1667 although all private bankers issued their own money until a monopoly on issuance was conferred on the Bank of England under the Bank Charter Act 1844. The Bank had been established in 1694 although the Riksbank had been opened in Sweden in 1656 and then closed and reopened as the National Bank in 1668. The use of long-term transferable debt instruments or annuities was imported from The Netherlands in 1693 although shorter-term Exchequer Bills were sold in 1696 and then ‘Consoles’ from 1751 onwards.

Early English banks were partnerships or unincorporated associations. The right to incorporate by registration was introduced in 1844 and limited liability in 1856 although the use of joint stock banking companies was initially limited. Joint stock banking did not become common until the end of the 19th century with a wave of consolidation at the beginning of the 20th century and again after the Second World War.

Trading in securities dates from the unregulated practices of the coffeehouses in the City of London from the 1700s. A number of the City of London’s major financial institutions began in such coffeehouses as Garraway’s, St Paul’s, Jonathan’s, The Jerusalem and The Baltic. Intermediaries or brokers raising funds to invest in overseas trading expeditions and long-haul shipping voyages formed a club in Jonathan’s Coffeehouse in 1760 which became the Stock Exchange in 1773 with an original Deed of Settlement in 1802. Merchants and insurers met in Edward Lloyd’s Coffeehouse and then in The New Lloyd’s from 1769. Offices were led at the Royal Exchange and then later in Leadenhall Street in 1928 and then Lime Street in 1958. The Baltic Shipping Exchange began with meetings of merchants and ships’ captains arranging freight and shipping in the Jerusalem Coffeehouse and the Virginia and Maryland Coffeehouse which became the Virginia and Baltic and then the Baltic in 1810 with the Baltic Club regulations being produced in 1823.

2. FINANCIAL GROWTH

(1) Market Size

The substantial expansion in the size and scope of financial markets can be understood with reference to a number of key indicators:

(a) The total global stock of core financial assets reached US$140tn (£70.66tn and Є104.49tn) by 2005 with the ratio of global financial assets to annual world output increasing from 109% in 1980 to 316% by 2000 (McKinsey Global Institute);
(b) The ratio of bank deposits to financial securities has reduced from 42% to 27% between 1980 and 2005 as part of the larger process of securitisation of debt and growth in the importance of investment as opposed to commercial banking;
(c) The total global nominal value in over-the-counter (OTC) financial derivatives has expanded from US$3.45tn in 1990 to US$286tn by 2006 and subsequently to US$370tn;
(d) In terms of alternative investment, the number of hedge funds has grown from 610 in 1990 to 9,575 by beginning 2007 with a total of US$1.6tn under management at the same time as private equity funds have grown to 684 vehicles with US$432bn of commitment.
(e) The amount of money placed in non-life insurance and life or pension cover has also grown substantially (with Lloyd’s of London earning £10bn in profit a day although before the summer 2007 floods in England and Wales).

One of the core difficulties that have arisen with this expansion in wealth is that it is not evenly held. Total financial assets owned by residents in higher income countries has increased from 50% of GDP to 100% between 1970 and 1985 and then again to 330% by 2004.

Earlier US dominance has since shifted although investment spreads remain uneven. US private equity investment fell from 68% in 2000 to 40% by 2005 with a corresponding drop in funds raised from 69% to 52%. Investments grew from 17% to 43% (17-38% of funds raised) in Europe with Asia Pacific growing from 6% to11% between 2000 and 2005.

Some of the US banks are still among the largest financial institutions in the world. Over 50% of US investment bank income is nevertheless now generated abroad with 75% of global growth occurring outside the US. The largest financial institution is now in China replacing Citigroup’s dominance with many other large Asia and European groups emerging following recent further consolidation within the industry.

(2) Market Change

Markets have been subject to substantial growth in recent decades. Markets have benefited from the relatively stable conditions that arose after World War Two that allowed the substantial reconstruction of many European economies. International monetary stability was secured under the Bretton Woods system of managed exchange arrangements entered into in 1944 which fixed the value of the US dollar to gold and all other currencies to the dollar. Funding was also made available through the US Marshall Plan and other assistance. Markets were disrupted with the move from fixed to floating currencies and the abandonment of the Bretton Woods exchange standard between 1971 and 1973 and again with the Third World debt crisis beginning in Mexico in 1982. The global economy was also rocked by the Asian financial crisis beginning in Thailand in July 1997 although it recovered substantially until the international credit crisis beginning in August 2007. It will take one-two years for the effects of the credit crunch to be absorbed. It is then expected that financial markets will continue to proper and grow thereafter.

(3) Market Transformation

Financial markets have undergone significant change especially since the early 1970s and the collapse of the Bretton Woods system. The main changes can be summarised as follows:

(a) Liberalisation and deregulation of many market access, regulatory and capital or foreign exchange restrictions;
(b) Technological advances especially in computer software and hardware and telecommunications;
(c) Market integration (on a cross-border and then cross-sector basis) and globalisation more generally subsequently;
(d) Advances in risk management and financial innovation and engineering including, in particular, the construction of modern finance, portfolio and investment theory with the advances that that has permitted in terms of risk identification, measurement and management;
(e) The stable financial and monetary policy conditions that have generally applied since the exclusive reliance on fiat money with the collapse of Bretton Woods in 1973 (unsupported by gold) and the favourable credit conditions that have arisen since especially in the last 4-5 years.

(3) Market Transformation and Innovation

These changes have permitted a restructuring of financial products and markets. This can be seen in the emergence of a number of key factors:

(a) There has been an explosion in the size of almost all financial markets (below);
(b) Financial markets have become increasingly trade and transaction rather than bank and relationship based (below);
(c) There has been the emergence of a number of new complex products beginning with financial derivatives (in the mid-1970s following the collapse of Bretton Woods), the dis-intermediation of many products (especially with commercial paper), the securitisation of underlying receivables and loan-based products; subsequently packaging of outstanding debt and then the most recent expansion of new structured products including the linking and layering of exposures as well as ‘privitisation’ of the main markets and market functions (below)).
(d) A number of new institutions have emerged especially with the growth in the alternative investment market including, in particular, with hedge funds and private equity and with the corresponding expansion in the number and types of investors including pension funds, corporate treasuries, government agencies, specialist investment vehicles and individual investors more generally especially with the continued expansion of private income in a number of countries and with the growth in private pension provision.

(4) Market Trends

A number of key trends can also be identified within financial markets more specifically:

(a) Dis-intermediation (with the issuance and trading in debt by institutions directly without financial institution support);
(b) Securitisation (with the move from inherently non-transferrable loan to transferable debt or security instruments);
(c) Repackaging and structured financing (with the restructuring of debt packages and linking of product profiles including, in particular, financial derivatives especially with the growth in credit derivatives (including total return swaps (TRS), credit spread swaps (CSS) and credit default swaps) as well as credit linked notes (CLNs) and collateralised debt obligations (CDOs);
(d) The ‘privitisation’ of debt with the use of over the counter (OTC) markets, off-exchange transactions and in-house markets (internalisation); and
(e) The ‘deconstruction’ of risk with the layering of exposure tranches and separate trading of differently rated or graded paper created and consequent creation of a considerably higher degree of market complexity financial marketplace involving the spread or diffusion (rather than dilution) of risk across many parts of the market and counter parties.

It is possibly the deconstruction and separate trading of risk that creates the more significant challenges for regulators and central banks. The total amount of risk within the system is not diluted or diminished in any way. Total or aggregate exposures have increased significantly in recent years with the risk simply being broken up or parcelled and spread around with no individual financial institution or authority being able to assess or oversee the total risk created and the ability of the financial system to support that exposure.

This creates complex information problems especially in terms of data collection, aggregation and assessment. More fundamental problems also arise in terms of risk management with individual institutions simply purchasing and trading in risk products or exposures but with no underlying initial or original management function being undertaken. Credit tranches are simply graded by rating agencies at the time of issuance and then sold on by financial institutions sequentially with no one party wishing to hold the debt at default.

The historic and original function of bank credit examination and associated personal credit relationship has been replaced by ratings and trading. As unregulated institutions, the role and function and capability of the rating agencies have also been questioned recently especially with the errors made with the pricing of debt in the US sub-prime market and the consequent credit crisis that arose during summer 2007. The European Commission has, in particular, announced an enquiry into the effectiveness of rating agencies and their responsibility in this regard.

(5) Market Capability

The ability of financial markets to with stand cyclic downturns and shocks has strengthened in recent decades. This has occurred as a result of a combination of factors:

(a) Increased market transparency within and across markets and market sectors;
(b) Increased market information with growth in support services examining and presenting data effectively;
(c) Increased complexity and sophistication of markets and market earnings with consequent improvement in liquidity and credit conditions;
(d) Substantial improvements in model risk identification, measurement and management techniques;
(e) The emergence of more sophisticated and specialist central banking functions which can more effectively manage monetary and credit conditions and provide liquidity or other emergency support as necessary.

3. FINANCIAL MARKETS

A market is any identifiable location, system (including electronic system) or formalised relation through which any product or commodity can be valued, bought or sold. A financial market is then any organised process through which financial assets, instruments or claims can be issued and traded. An exchange more specifically is any identifiable location through which instruments or claims can be issued and traded. A stock market is any organised or regulated marketplace for the trading of government or corporate stock and shares or other financial assets.

(1) Financial Function

Financial instruments and financial markets carry out a number of essential functions without which only the most primitive of economies could operate. Money is necessary as a unit of value (including bills of exchange, promissory notes and cheques), store of value and means of exchange. Other paper-based instruments and other electronic systems are essential for payment purposes. Paper securities were used to evidence entitlement to a proportionate share in the aggregate assets of a corporate entity although much of this is now either issued or transferred in an electronic form.

The key functions of financial instruments and markets can be summarised as follows:

(a) Deposit or safekeeping (either for custody or safekeeping or income generation);
(b) Loan or credit;
(c) Payment (paper-based or electronic);
(d) Investment (combining return of principal and income either through dividend (on equity) or interest (on debt));
(e) Risk cover or insurance.

The structure and operation of modern economies would be impossible without these key core facilities and functions.

(2) Financial Assets

Financial assets include any property with a monetary value. Under English property law, the following classes of asset may be distinguished:

(a) Real property or land (heritable property in Scotland) including leasehold property under s1(1)(b) of the Law of Property Act 1925 although leaseholds are strictly personality (or chattels real).
(b) Personal property comprising:

(i) Tangible moveable property (corporeal personality);
(ii) Intangible moveables including (i) again, documentary intangibles (in which the right is embodied in the document) or (ii) pure intangibles or ‘choses in action’ (claims).

Money would constitute a tangible moveable item although most financial assets exist in the form of financial instruments or pure claims. A financial instrument is a document of title to money in which the right to receive payment is held within the instrument and transferable with the instrument. Instruments may either involve an undertaking to pay a sum of money (including a bank note or promissory note, Treasury bill or bearer bond) or an order to pay another a sum of money (including a bill of exchange or a cheque which is legally a bill of exchange drawn on a bank). Financial instruments are further either negotiable or non-negotiable with negotiability referring to the capacity of the transferee to acquire perfect title subject only to having had no notice of any prior defect in title. Negotiability was historically conferred as a matter of practice on bills of exchange and cheques which was essential to their historical value and importance.

A security is a financial asset of claim representing either a debt obligation issued by a government or corporate body or an interest in the company concerned. Government debt instruments are generally referred to either as bills or gilts (UK only) and as debentures or bonds by corporate bodies. Security will nevertheless also include shares or equity issued by companies which constitute a proportionate ownership entitlement in the assets of the company. A share is in the interest of a shareholder in the company measured in money with shareholders entering into a series of mutual covenants between themselves (Borland Trustee v Steel [1901] 1 Ch 279, 288 Farwell J). The company is nevertheless a distinct legal entity from its shareholders (Salomon v Salomon & Co Ltd [1897] AC 22) with shareholders holding no equitable interest in the company’s assets directly (Macaura v Northern Assurance Co Ltd [1925] AC 619). A statutory contract also exists between the company and its members under s14 Companies Act 1985.

(2) Financial Intermediation

Banks, securities firms and other financial institutions are ‘financial intermediaries’ carrying out a number of core functions involving financial assets on financial markets. Financial intermediation refers to the matching or linking of excess with deficit capacity needs. Parties with excess assets (savings or investment) are brought together with those requiring funds (borrowers) to their mutual advantage. Financial intermediation adds value in a number of ways:

(a) Receivers receive a secure return on their funds;
(b) Borrowers are able to pool (increase) and transform (extend) maturities (the time for repayment);
(c) Ancillary payment services are provided;
(d) Credit risk is assessed and managed;
(e) Credit risk is properly priced;
(f) Credit risk is subject to specialised management and especially by banks;

(g) Lower transaction costs;
(h) Consequent reduction in counter party risk and exposure;
(i) Provision of general information management service;
(j) Overall increase in credit volumes (credit multiplier) and investment within economy and consequent increase in welfare.

(4) Financial Advantage

Apart from the core functions identified, a number of other advantages can be attributed to financial markets.

(a) They increase the total amount of investment capital available nationally and globally;
(b) Market liquidity is correspondingly improved;
(c) There is a better allocation of resources in all markets;
(d) Transaction costs are lowered;
(e) Consequent gains in efficiency arise;
(f) Market and corporate or management discipline is strengthened;
(g) Market transparency and information management is improved;
(h) Market information is better collected, distributed and assessed;
(i) Underlying trade and commerce expands;
(j) Welfare gains are realised more generally.

Against these disadvantages, however, markets can also be considered to be:

(a) Inherently unpredictable;
(b) Consequently unstable;
(c) Inefficient and ineffective (in the absence of perfect information and conditions);
(d) Involve high maintenance costs especially with the need for government and central bank support;
(e) Potentially to be fundamentally unfair.

Markets can be considered to be unfair in that:

(a) Benefits are disproportionately and unevenly enjoyed;
(b) Markets operate in a remote and distinct manner from the general public;
(c) People have no sense of participation or control;
(d) There is no consequent sense of ownership or benefit; and
(e) Markets operate without personal, social or cultural responsibility and can be considered to have no ‘soul’ and are fundamentally inhumane.

Other specific difficulties can also be identified at the national and international level:

(a) National fiscal collection, taxation and welfare distribution systems do not work effectively with many corporate groups paying little or no tax (although UK banking and financial services pays a disproportionate £6bn in tax per annum as against £05.bn tax for industry and commerce more generally);
(b) Cross-border monetary management and relations have to be managed more effectively;
(c) Foreign exchange and payment imbalance problems have to be removed;
(d) Increased regulatory co-operation and co-ordination of action has to be introduced especially with continuing problems ‘moral hazard’ being removed through the reintroduction of some effective market exit (bankruptcy) threat;
(e) Emerging markets in developing countries require proper sequencing of investment and market reform.

(5) Financial Crisis

Markets are inherently cyclic and unstable. Markets enjoy substantial growth and sustained increase in earnings during the ‘bull’ conditions between 2003 and 2007. This was only halted with the tightening in credit conditions that arose during summer 2007 following the tightening of conditions on the international inter-bank market after the losses sustained by a number of smaller specialist vehicles in the US sub-prime mortgage market. The stability of the larger banks was never threatened although a number of more specialist “conduits” or specialist investment vehicles had to be closed down or supported at the same time as losses were suffered by a number of hedge funds which either had to be re-capitalised or closed. It is not yet possible to determine whether the 2007 credit crisis represented a correction in market conditions or the beginning of a more sustained downturn.

International markets also sustained losses following the 1997 Asian crisis beginning with the collapse in the value of the Thai bhat in July 1997 and then with the crisis in the Long-Term Capital-Management (LTCM) in 1998 which had to be supported by a number of other institutions. There was also a fall in stock market prices following the end of the technological “bubble” in 2000 and then following the terrorist attacks on 9.11.2001 although no major continuing damage was sustained.

The reputation and credibility of financial markets has suffered in recent times following a number of high profile scandals and crises. Although few created larger systemic threats, damage was sustained to their credibility and continued viability as attractive investment sectors for smaller corporate or individual investors. Significant scandals include:

Recent incidents of specific scandal include the following:

4. Financial Control

Financial markets provide a number of core functions and services without which the modern economy could not have been constructed nor operate. In so doing, a large number of specific advantages arise especially through the intermediation process and with the overall consequent increase in the stock of financial assets and wealth within any society. Markets are nevertheless unstable and vulnerable to falls or collapse. Banking markets are inherently unstable in light of the dislocation of the deposit and lending function with a maturity gap (mismatch or transformation) arising between the bank’s ability to borrow short-term funds (through deposits or inter-bank borrowing) and on-lend on a medium to long-term (5, 10 or 15 year) basis. Crises partly then arise as a result of financial institutions inability to manage the specific risks that arise with their particular type of business as well as with other scandals following human error or abuse.

(1) Financial Risk

Recent substantial increases in risk management capability and market liquidity must nevertheless be considered against the nature of the underlying risk concerned and other aggravating risk factors. The principal financial risks remain:

(a) Credit counter party default risk (involving the non-payment of interest during term and/or non-repayment of principal on maturity);
(b) Market or position risk with fluctuations in the value of debt or equity stock quoted on formal markets or sold secondarily;
(c) Foreign exchange or currency risk (including settlement or “Herstatt Risk” with the non-completion of one side of a currency transaction);
(d) Interest rate risk (which may affect debt instruments specifically as well as create unfavourable conditions across markets more generally);
(e) More complex financial derivatives and commodity related risks (especially on options including ro, beta, delta, gamma and theta).

Other market factors are also relevant in considering the current condition of national and global systems. These are, for example, monitored by the Financial Stability Forum (FSF) at its six-monthly meetings. These include:

(a) Corporate debt has soared with total global mergers and acquisitions in 2006 amounting to US$3.861tn (up from US$850bn in 1995) with 3,141 and 9,251 individual deals respectively;
(b) The significant recent growth in household debt (with UK liabilities increasing from 108% to 159% of GDP between 1994 and 2005 and with over £1tn now outstanding and with comparable increases from 92% to 135% in the US and in Europe);
(c) Significant global payment imbalances especially with the continuing US trade deficit and perceived high value of the Chinese Yuan;
(d) Specific market concerns such as with the recorded defaults on the US sub-prime market and its knock-on effects in the US and elsewhere;
(e) Consequent liquidity pressures including the credit crunch that arose during summer 2007 with the potential consequential and contagious effects that that may have.

Other more specific continuing concerns within the financial sector include:

(a) The value of structured finance products and, in particular, the original rating grades attached;
(b) The susceptibility to hedge funds to downturns in markets especially for macro funds which make the wrong bets or other funds to credit conditions more generally;
(c) The ability of equity finance vehicles to continue in operation without favourable credit terms and the overall value and effectiveness of such a highly leveraged and substitute management based model;
(d) Possible foreign exchange instability especially with the continuing low dollar and high Yuan;
(e) The sustainability of the ‘carry trade’ market (especially with the borrowing of funds in Japan and re-lending them elsewhere) with credit tightening and with the continued value and effects of the international remittances market (with overseas residents transferring substantially large amount of money back to their home countries for family or investment purposes).

All of these basic exposures and aggravated factors must be taken into account in considering the condition of the global financial system.

A number of more general trends can then be identified. These include the emergence and dominance of new complex products. Markets have also generally moved from being loan to debt (producer to trader) based with a collapse in a traditional relation and personal banking. Finance and capital markets have assumed a new autonomy especially with the separation of the new global economy from the underlying trade or mercantile market. Global finance has also become increasingly “Anglo-US” based with the emergence of London and New York as the principal financial centres and, in particular, with the more recent pre-eminence of London following a number of reports on US markets.

(2) Financial Regulation and Supervision

The purpose of financial regulation is to protect the stable and efficient operation of the markets. For this purpose, all relevant risks have to be identified and managed. Risk must immediately be dealt with at the firm level although appropriate external requirements have to be imposed to ensure that firms maintain the necessary systems and operate within accepted practices.

(a) Financial Regulation

Financial regulation can then be understood to refer to the legal rules, regulations and administrative requirements either adopted by firms on a self-regulatory basis or imposed by financial authorities to limit or control the risks assumed by financial intermediaries. Supervision then refers to the monitoring of compliance with those standards or the more general operation of the marketplace.

(b) Financial Rules

Regulatory provisions can then be considered to be made up of a mixture of financial rules, conduct rules and market rules. Financial rules are concerned with controlling the entry and exit from the specific marketplaces. Market entry requirements are essentially based on initial authorisation (licensing or entry conditions), continuing supervision (based on the filing and submission of continuing returns, reports and relations (through management and regulatory meetings) as well as special visits and inspections) and enforcement in the event of breach (including sanction in the form of fine or censure as well as restriction or cancellation of authorisations or other protective measures such as injunctions or freezing orders).

(c) Conduct Rules

Market exit rules are then concerned with asset realisation of the failed institution (generally based on winding up and insolvency laws) and liabilities claims resolution (with appropriate complaints, compensation (deposit protection or insurance) and other corrective action powers on behalf of the relevant recovery agent in the event of the firm’s closure and insolvency.

(d) Market Rules

Conduct rules are concerned with ensuring that market participants (firms and individuals) operate in accordance with relevant accepted standards. These consist of basic criminal laws (including prohibitions on theft, fraud and insider trading) as well as supporting civil law remedies (such as penalties for market abuse, misrepresentation and statutory damages). More specific ‘conduct of business’ (COB) rules will also be imposed in more complex sectors such as in the securities area where firms have to manage difficult firm/client and inter-client conflicts of interest. The current main UK conduct of business rules are set out in the revised Conduct of Business Sourcebook (COBS) contained in the Financial Services Authority’s (FSA) Handbook of Rules and Guidance as amended by relevant European provision. A separate insurance conduct of business (ICOB) has also been adopted recently.

Market rules deal with the structure and operation of specific formal markets. These include provisions in connection with primary debt or share listing, subsequent secondary trading or dealing and the clearing and settlement of trades. Clearing refers to the netting or offsetting of multiple sales and purchases in the same stock during the trading period to produce a net final amount due. Settlement refers to the actual exchange of cash and security on the agreed settlement date which generally takes place within three days of the trade (T+3) under best global practice.

(e) Market Support

While all of these financial, conduct and market rules are designed to ensure that markets operate in an effective and stable manner on a continuing basis, additional reserve, support or corrective mechanisms must also be maintained. Financial regulation can then be concerned with internal or intra-market issues with an external support system also being required. Compensation for specific financial consumers (bank depositors, security investors and insurance policyholders) is dealt with through some form of deposit protection or insurance which guarantees minimum payments in the event of the collapse of the institution involved. Where the stability of the banking system more generally is threatened, the central bank will provide separate emergency assistance to banks in need of funds. The central bank will then act as a form of ‘lender of last resort’ (LLR) to the banking system. A ‘moral hazard’ danger nevertheless arises in that banks may then take excessive risk in anticipated reliance on the emergency funds being available.

A series of LLR rules was accordingly developed during the 19th century to attempt to deal with this. These were clarified and restated in the writings of the famous economist Walter Bagehot in his collective series of papers on ‘Lombard Street’ (1876). Under the Bagehot rules, emergency funding should only be made available where a bank is experiencing liquidity rather than solvency difficulties with funds only being provided on a penal basis either at high interest rates or on substantial collateral to act as a disincentive to reliance. Funding must only be made available to already insolvent banks where the collapse of the particular institution may otherwise threaten the stability of financial system.

These traditional LLR rules also generally only apply with regard to banks with emergency funding not officially having been made available to securities firms, insurance undertakings or other financial institutions. A reserve facility was nevertheless put in place in the US under the Federal Reserve Act. The authorities nevertheless rarely considered using this until their most recent credit crisis during which it was accepted that funds may have to be made available to securities firms. The effect of the integration of financial markets and construction of more complex financial groups has required that traditional LLR rules have had to be reconsidered. It may be that funds are still only made available through banking markets although these can then be redistributed within larger groups and across financial sectors. A number of more specific but still significant extensions to traditional UK LLR practice also occurred following the emergency support provided to Northern Rock by the Bank of England beginning on 14 September 2007.

(3) Financial Theories or Objectives

The traditional objectives of financial regulation have been individual depositor (or investor or policyholder) protection and market or financial stability. The failure of an individual contract or transaction or collapse of a particular financial institution may result in immediate loss to the relevant consumers (depositors, investors or policyholders) involved. Larger crisis may also threaten the stability of the specific market. The particular danger that arises in the banking area is that concerns with the stability of a particular bank may result in a withdrawal of funds from the bank (a run) which may threaten the stability of the bank. The closure of an individual bank may then threaten the stability of other institutions either through direct credit exposures or though parallel runs. Where a number of banks are involved, this process of contagion (or domino) may be sufficient to threaten the stability of banking market, but this would then result in a systems or systemic threat or collapse.

(a) Banking Markets

This problem of contagion and systemic collapse is more prone in the banking market due to the underlying maturity mismatch or transformation problem referred to earlier with banks funding themselves through short deposit or wholesale borrowing and then lending this medium to long-term. In the event of a large withdrawal of funds, the bank will not be able to realise funds quickly as these will have been committed to medium to longer terms loans. As personal debt obligations, these cannot be transferred or sold easily. They can be assigned although an assignee may want some reduction in value due to their inability to carry out the same initial credit checks on the borrower. If a loan or funding book has to be sold quickly, this may result in a substantial reduction or ‘fire sale’.

(b) Securities Markets

Securities markets have traditionally not been subject to the same danger of contagion and systemic collapse. This is due to the absence of the same underlying maturity mismatch or transformation as securities firms hold transferable security instruments. These can generally be easily sold on a formal or over-the-counter (OTC) market. As securities firms will also not have the same direct lending exposure to each other as with banks, the same risk of deposit withdrawals (runs) and contagion does not arise. Increased concerns have nevertheless arisen in recent years with the large volume of securities transactions taking place on the main exchanges and with operational or settlement (‘plumbing’) problems. The operation of major markets was threatened, for example, on Black Wednesday in 1987 and following the terrorist attacks in 9.11.2001. Difficulties also arose on the London Stock Exchange on 9.11.2008 with trading having to be suspended for a period.

(c) Insurance Markets

Insurance markets are also not subject to the same dangers of contagion and systemic collapse. Difficulties may nevertheless arise where firms fail to invest appropriately to ensure that they have sufficient income to cover their ongoing fixed (life cover) or contingent (fire and other risk insurance) contingent liabilities. Insurance firms operate by investing the premia received from clients in portfolios of assets to generate an adequate return to cover their liabilities.

(d) Complex Groups and Financial Conglomerates

The most recent significant concern that has arisen has been with regard to the emergence of large complex groups of financial conglomerates made up of banking, securities and insurance firms. The difficulty that arises in this case is that losses suffered in any market and including specifically the more volatile securities, currency or derivatives markets can spread to the banking component of the group and possibly trigger a bank run, contagion and a systemic threat. This risk of ‘inter-group’ or ‘cross-sector loss transfer’ has to be managed carefully.

(e) Complex Objectives

More modern regulator systems have nevertheless tended to adopt more complex objectives. The new regulatory system set up in the UK under the Financial Services and Markets Act, for example, imposes four specific statutory objectives on the Financial Services Authority (FSA). These consist of maintaining market confidence, promoting consumer protection and consumer education and reducing financial crime. The FSA has explained that it interprets maintaining market confidence to include ensuring market stability more generally. A number of additional more general but less formal ‘supervisory principles’ are also imposed under s2(2) FSMA based on proportionality, management responsibility, efficiency and competition.

The effect of this is that in practice, the FSA in the UK considers a large number of possibly conflicting objectives in designing and implementing regulatory policy. The objectives of modern financial regulation have accordingly become considerably more complex. This may be considered to include each of the following which have to be effectively balanced and prioritised in practice:

(a) Financial stability;
(b) Financial education or capability;
(c) Financial efficiency;
(d) Financial competition;
(e) Financial innovation;
(f) Financial effectiveness;
(g) Good financial conduct;
(h) Reduced financial crime;
(i) Promotion of good standards and financial ethics more generally;
(j) Increased financial contribution and welfare more generally.

(4) Single Regulator

The integration of financial markets and operation of large complex groups of financial conglomerates has led to the establishment of single integrated regulators in a number of countries. This has been referred to as ‘the single regulator’ debate. Three separate sets of issues are nevertheless involved with initial agency or institutional integration (single regulator), corresponding statutory or regulatory harmonisation (single regulation) and the degree of underlying cross-sector financial integration to be permitted (single market). Each of these separate issues has to be distinguished.

A number of arguments can be developed for and against such regulatory integration. These are generally based on policy grounds (integration, consistency, simplicity, review and development), institutional grounds (administrative control, contact and communication, better allocation and use of resources, improved training and enhanced internal and external accountability) and operational grounds (efficiency, responsiveness, flexibility, cost and competitiveness). A number of corresponding arguments can nevertheless be developed against each of these arguments generally based on issues of administrative concentration, loss of regulatory (inter-agency) oversight and competition, potential increased regulatory burden and cost and lack of transparency and accountability and abuse. Appropriate corrective mechanisms can nevertheless be adopted in each case. The issue is then not one of whether any specific single or multiple regulator solution applies on a theoretical basis but on a corrective adjustment. The single or multiple regulator choice must be taken having regard to the local market, economic, legal, regulatory and to some extent political conditions with an appropriate set of corresponding corrective measures or adjustments being put in place to deal with the corresponding disadvantages that arise depending upon which option is selected.

With the more recent changes that have taken place in markets, however, there has almost been the emergence of an increased presumption in favour of regulatory integration rather than the continued use of a multiple regulatory model. A number of factors have tended to favour the move towards an integrated solution. These include:

(a) Increased market complexity and degree of underlying market integration that has taken place in recent years;
(b) The multiple objectives adopted by regulators and the new complexity of regulatory models;
(c) Massive demands of complex information collection, processing and exchange in modern markets;
(d) The need for co-ordinated regulatory action and enforcement; and
(e) The need for co-ordinated and extended market support mechanisms in the event of a major crisis.

(5) Regulatory Reform

Modern financial regulation has become considerably more complex as a result of all of the changes that have taken place in recent years. This has affected regulatory practice in countries in different ways although a number of more general changes and trends are identifiable. These are still more clearly identifiable in the UK which has constructed one of the most sophisticated single and integrated regulatory models in the world. The new UK regulatory agenda may be summarised as follows:

(a) The regulatory system has become increasingly ‘risk based’ as regulatory objectives are targeted to secure a large number of key risks or exposures;
(b) The system has become increasingly rules (rather than law or statute) based and then more ‘principles’ based with consequent improvements in terms of flexibility, speed of adaptation and promotion of a more generally compliance culture although this has to be balanced against concerns of increased uncertainty, enforceability abuse and consequent legality issues;
(c) The regime has become more clearly objectives based with a number of parallel objectives being pursued (including financial stability, capability, efficiency, competition, innovation, effectiveness, conduct, crime, ethics and contribution – above);
(d) The adoption of rules and principles are based on a new ‘better regulation’ procedure which includes:

(i) Full consultation;
(ii) Maximum transparency;
(iii) Conduct of full cost benefit analysis;
(iv) Completion of a proper competition analysis; and
(v) Respect for necessity and proportionality.

(e) Modern financial regulation has ultimately become increasingly market based with a reliance on market solutions as regulators have moved from more traditional regulatory intervention to firm self-assessment compliance for focus on market results and effect.

We are beginning to see the emergence of a new national, regional and international regulatory agenda based on these new trends. There is a new complexity and sophistication in modern financial relations, policy and control which reflects significant underlying advances in technology and the risk based nature of modern market practice, products and services.

5. FINANCIAL OPPORTUNITY

International financial markets have been subject to a number of recent crises especially during the post-War period. Necessary corrections have to be made following extended periods of asset and commodity price growth. The difficulties that have arisen can be corrected and action taken to avoid future similar crises arising. Markets remain of fundamental importance and value. Many of the most significant challenges in the world today have not been caused by the markets directly but can be dealt with through the funding and investment opportunities created through the markets. Lessons can also be learned from past international financial crises.

(1) International Financial System

The international financial system refers to the agreements, rules of practices that allow currencies to be exchanged, current payments to be made on a cross-border basis and a measure of value for future or deferred payment. Informal arrangements have always been possible although formal mechanisms generally date from the adoption of the Gold Standard. Exchange rates may either be managed on an automatic basis (using a fixed commodity or floating currency system), an exchange standard regime (with one currency being fixed to a commodity such as gold and all other currencies fixed to the standard currency), multilateral exchange rate management (through policy co-ordination and short-term payment adjustments) or a monetary union (with a common currency).

(a) Gold Standard 1816-1933

The Gold Standard was only officially adopted by Britain in 1816 although it had been in operation for almost a century before. This operated as a fixed commodity system with currencies being fixed to a standard weighted measure of gold which controlled inflation and promoted financial stability. The original system was replaced by the Gold Exchange Standard with sterling being fixed to gold and a number of other currencies fixed to sterling. US dollar replaced sterling as the main reserve currency in 1914 with the system being abandoned in the early 1930s.

(b) Bretton Woods 1944-1973

The Allies had met in Bretton Woods, New Hampshire ten months before the end of World War Two to agree an alternative reserve system following the financial instability of the inter-war period. Under the Bretton Woods arrangements, the value of the US dollar was fixed to gold and all other currencies fixed to the dollar subject to a formal adjustment mechanism. The system came into effect in March 1947 although full convertibility was not restored in Europe until December 1958. Under the arrangements, participating countries could exchange US dollars for gold at any time. Convertibility was suspended on 15 August 1971 following the pressure created by a growing US balance of payments deficit and speculative attacks. An attempt was made by a specially convened Committee to design an alternative arrangement under the Committee of Twenty and its Outline of Reform document in June 1974 and the earlier Smithsonian Agreement in December 1971 although this was abandoned and currencies allowed to float in 1973. The adoption of a formal international floating exchange rate arrangement was agreed with an amendment to the Articles of Agreement of the IMF in 1976 and a revised Article IV and enhanced and extended surveillance and conditionality.

(c) Petrol-Dollars and the Debt Crisis 1974-1989

As the price of oil had been denominated in dollars, the OPEC countries introduced significant increases to compensate for the 25% drop in the value of the dollar following the abandonment of the Bretton Woods system. A series of oil price hikes occurred in 1973/74 and 1979. These were also aggravated by instability in the Middle East especially with the Yom Kippur War. The funds received by the oil exporting countries were then recycled in the form of ‘petrol-dollars’ through the main international financial markets including, in particular, the City of London. Substantial growth occurred in the euro-dollar markets including the syndicated loan and Eurobond sectors.

Large amounts of the new funds available had been lent by major international banks to emerging market governments to fund domestic infrastructure and other investment projects. The petrol-dollars were then recycled from the oil exporting to the oil importing countries. Following a downturn in global markets, some countries were unable to continue to service their debt levels with Mexico announcing on 13 August 1982 that it would suspend payments. The debt crisis then spread to other Latin American and then Asian countries. Brazil defaulted on 10 November 1982 with 37 other countries following in Latin America, the Caribbean, Africa and Eastern Europe. A total of US$140bn in commercial bank debt had to be rescheduled during the 1980s. The total amount of the debt stock had then increased to US$200bn by the mid-1980s with two major long-term management initiatives being launched by US Treasury Secretary James Baker in October 1985 (based on a sustained growth and balance of payment adjustments package) and by Nicholas F Brady in March 1989 (including the conversion of bank debt into guaranteed ‘Brady Bonds’).

Mexico’s total debt stock had been reduced by 15% and bank debt by 30% under the Baker and Brady plans although further difficulties recurred following political assassinations and economic instability in March and September 1994. The value of peso collapsed by 50% on 10 January 1995 with US$28bn of government bonds (tesebonos) being dumped, despite President Ernesto Zedillo promising that there would be no repeat moratorium although a massive private sector and US government supported guarantee package had to be put in place worth almost US$50bn with two further IMF standby facilities of almost US$18bn.

(d) Asian and Russian Crises 1997-1998

Many Asian economies including Hong Kong, Japan, Singapore, Taiwan, Thailand and the Republic of Korea had enjoyed spectacular growth of over 5% GNP between 1965 and 1990 and over 9% between 1992 and 1995. Difficulties nevertheless remained with the high levels of short-term investment involved, high levels of bank credit, poor loan practices (or ‘crony capitalism’) and fundamentally weak systems of banking and financial control. The Asian crisis began in Thailand with the collapse in the value of the Thai baht on 2 July 1997 with the government abandoning its peg against the US dollar. Despite an immediate recovery, concerns nevertheless remained with regard to the strength of the financial system. The crisis quickly spread to Malaysia, Indonesia and The Philippines with average currency depreciations of between 25-33%. The Hong Kong dollar was subject to a speculative attack with the crisis spreading to South Korea and economic damage suffered in Japan. The contagion had spread to Latin America by the end of 1997. Brazil had to protect the real early in 1998 with Russia defaulting on its debt in August 1998.

(e) Credit Crisis 2007-2008

Financial turmoil arose again ten years and one month later with the credit crisis beginning on 9 August 2007. Concerns had arisen with regard to the stability of US sub-prime mortgage market which had been used to support asset-backed securities including collateralised debt obligations (CDOs), large amounts of which had been sold on to off-balance sheet structured investment vehicles or bank ‘conduits’. The CDOs had been highly rated by rating agencies which had not taken into account the possibility of significant levels of default on the underlying mortgages involved as a result of poor or fraudulent sales practices in the unregulated US mortgage market. Significant losses were reported by many major financial institutions with inter-bank markets consequently drying up on 9 August 2007 as banks decided to hoard cash rather than on-lend to each other. The US Federal Reserve and other central banks attempted to inject significant amounts of liquidity into the markets during the last quarter of 2007 and early 2008 with only limited effects.

The major UK casualty was the Northern Rock Bank which had a low (28%) deposit cover ratio and was dependent on the mortgage securitisation market for the majority of its funding. With the combined effects of the collapse in the asset-backed securities market and the drying up of credit on the inter-bank markets, Northern Rock was forced to approach the Bank of England for emergency assistance on 14 September 2007. The Government through the Treasury then had to make a number of announcements to confirm support for the bank to prevent a further bank run in September 2007. The Northern Rock was subsequently taken into public ownership (nationalised) on 17 February 2008 after the Government was unable to agree a private sector solution. A number of official documents have been issued examining the crisis and lessons and the most effective regulatory response.

(2) Market Challenge

A number of core challenges can consequently be identified:

(a) It is clearly desirable to attempt to ensure the continued production and generation of wealth through financial innovation and product and service development and expansion;
(b) There has to be an effective system of financial regulation in place in all countries and at all levels (including appropriate exit or bankruptcy mechanisms) to ensure longer term stability;
(c) There has to be effective controls on credit and liquidity levels by central banks with a continuing review of current monetary policy best practice;
(d) Balanced fiscal collection through taxation of corporate entities, in particular, must be ensured with an effective and fair distribution of welfare to individuals in all countries; and
(e) Effective systems of international development and indefinite support must be constructed to allow emerging and developing economies to share in the global benefits possible from the continued expansion of financial markets and systems.

A new international development model can be constructed on the basis of:

(a) Sustainable development;
(b) Revised systems of global governance (especially through reform within the main international financial institutions and inter-government organisations in non-government organisations);
(c) Continued improvements in human rights and the rule of law in all countries;
(d) Proper environmental protection (on a market model); and
(e) Consequent collective peace and security.

It is possible to adopt market solutions to many of the principal challenges that arise at this time. The core difficulties of uneven welfare distribution and support at the national level and lack of effective investment programmes for emerging economies at the international level can both be dealt with through market targeted devices.

We should be able to look for market solutions to many current problems based on underlying common economic interest, exchange and mutual benefit and advantage. The five core components are elements within any new global market solution and will be based on effective market function, stability, contribution, participation and governance.

(3) International Market and Economic Development

Financial markets and services remain of core importance in all modern and emerging societies. It is impossible to carry out any meaningful public, commercial or private (as opposed to personal) function without their involvement. Markets carry out a number of essential functions and services on which we are all dependent. These have created a number of clear advantages especially in terms of income generation and capital investment which have, in turn, allowed us to enjoy many of the industrial, commercial, scientific, medical and information or communications advantages than modern technology has facilitated. The modern post-industrial world without all of its substantial infrastructure, transport, public service and utility (including energy, water and sanitation) could not have been constructed without market-based income generation and reinvestment.

A number of correspondingly significant disadvantages nevertheless also arise. Financial markets are inherently unstable and prone to crisis or collapse. Markets should be allowed to operate on an open and deregulated basis where private incentives can correct any inefficiency. Official regulation and intervention is nevertheless necessary in all other cases. Markets are not immoral but amoral. External intervention is required to ensure that they operate in an efficient and effective manner in all cases and to prevent instances of abuse or distortion whether deliberate or otherwise. Appropriate support must also be provided by governments through local central banks to prevent systems or systemic crises. This must nevertheless be effected in such a manner as to limit the dangers of moral hazard and the rejection or avoidance of normal risk management precautions by institutions and individuals. This must involve the maintenance of effective exit mechanisms which allow insolvent institutions to leave the market.

The other core challenge is to ensure that appropriate mechanisms are maintained to ensure that the benefits of financial advance and income generation are appropriately shared and distributed. Financial institutions and other corporate bodies must be taxed appropriately with individual governments being responsible for the design and maintenance of the most appropriate distribution and welfare system for each country. As noted, financial institutions are among the highest taxpayers in most economies as they are not often not able to benefit from the same capital reinvestment allowances that industrial and other commercial operators can use. The provision of welfare support is nevertheless a public function and the responsibility of government rather than of the markets themselves although many medical, pension and other altruistic services are provided by financial firms.

Any modern market economy should accordingly attempt to continue to realise the full benefits available through the market system and market mechanisms. Efficient and effective markets nevertheless require appropriate levels of intervention and regulation to ensure that they operate properly and stably. Governments should also ensure that appropriate fiscal regimes are maintained that allow appropriate public charges to be made against financial institutions and other corporate bodies to fund national welfare systems. The relevant balance between fiscal extraction and service provision will depend on the size and sophistication of the local marketplace and prevailing political, social and cultural values.

A comparable model can also be applied at the international level with properly funded and targeted investment programmes being made available to support emerging and less developed economies. Financial investment must nevertheless be supported by appropriate technical, political and trade support with meaningful debt reduction being provided to remove the penalty costs of outstanding repayment charges. Emerging countries must nevertheless assume their own responsibilities in supporting these initiatives especially in setting up an effective public administration and judicial and court system and ensuring that they operate properly and without corruption, adopting all necessary laws (including in the central banking, commercial banking, securities, property and contract areas), competitive internal markets are created and that available sources of internal finance are mobilised. Land-locked countries or countries plagued by other geographic or natural difficulties including poor farmland, drought or pestilence will require additional assistance on a continuing basis. Other countries facing immediate natural disasters including hurricane or tsunami, other flooding or earthquake will also require immediate humanitarian assistance. Appropriate programmes can nevertheless be established to ensure that all countries at whatever level of market or industrial development are able to benefit and share from the wealth produced by the modern market economy.

(4) Market Value

Financial markets should insofar as possible be allowed to operate in an open, free and autonomous manner. This will generate maximum benefits in terms of growth, innovation and wealth generation. The complex information problems created within modern markets and society can only be dealt with through the market mechanisms. Adam Smith referred to the “invisible hand” of the market 250 years ago.

The capitalist model does not constitute a value system as such. Its key components nevertheless include private ownership, freedom of contract and the rule of law. Efficient markets also require that they are allowed to operate in an open manner without external interference or distortion and unfair benefit or advantage. The other core components include specialist production, an underlying market or exchange mechanism, a supporting system of credit or collateral, separate legal personality or corporate identity, capital retention and continuous reinvestment (which facilitates capital growth and innovation) and a favourable or, at least, tolerant fiscal and regulatory system.

Markets are amoral in that the core objective is profit maximisation and wealth generation as opposed to any separate higher order social or culture purpose. Several general principles can nevertheless be extracted from the description of the capital list model referred to including private property, freedom of action, enforceable rights and legal protection, a right to the provision of certain information and a prohibition on improper conduct. These principles could be considered to constitute a form of ‘market ethics’ or ‘market values’.

The market system also assumes a reasonable or proportionate degree of external regulation as well as external cost or taxation. Local taxes will cover the provision of utilities including transport, electricity and water. These charges will can also be made to cover other external costs such as pollution and environmental damage or degradation. A reasonable degree of corporate taxation is also imposed which will be used by central government for other public or social services considered necessary including a reasonable degree of welfare provision.

The ability of the market system to allow modern societies to operate as well as support other social or welfare functions within them could be referred to as ‘market ethic’ or ‘market humanism’. This uses humanism in a secular and non-religious manner which reflects one aspect of its historical development.) Certain general ethical principles are then implied by and can be extracted from market system while the larger economic and social infrastructure created (including income extraction and welfare distribution) can be considered in terms of a larger doctrine of market humanism.

This domestic market standard can then be extended at the international level to include certain further principles in terms of inter-state relations. These may include respect for territorial sovereignty, non-interference and peaceful settlement of disputes as well as free trade and open and co-operative relations. These reflect certain established general principles of customary public international law as well as various attempted formulations of provisions to govern relations between countries such as with the UN General Assembly proposals for a ‘Declaration on the Establishment of a New International Economic Order’ (NIEO) and ‘Chapter of Economic Rights and Duties of States’ (CERDS) in 1974. These ideas are also reflected in the more recent Monterrey Consensus on Financing for Development adopted in March 2002. This includes a commitment to certain general principles designed to promote national and international economic systems based on such key ideas as justice, equity, democracy, participation, transparency, accountability and inclusion. As of these objectives can be considered to underlie a stable national and cross-border market system and operate on a secular basis capable of equal application in all countries, all of these ideas could be considered to constitute a form of ‘global market humanism’.

Despite the essentially isolated and autonomous workings of the market system, it is possible to imply a number of core value principles within the market mechanism. These can then be extended to create a more general value system for modern society based on individual rights of action but within a larger tolerant, respectful and inclusive framework. This market best practice can then be extended again at the international level to create a system of relations governing state behaviour and interaction. This would include such principles as territorial and political respect, peaceful settlement, transparency, accountability, representation and inclusion.

This would reflect certain key ideas within liberalism and international liberalism historically although the underlying mechanism around which national and international economies and relations would be constructed would be expressly identified as the market system. In so doing, this would accept the benefits of individual labour and reward but do so within a larger system that respected the rights of others and protected those of the less able. This would reconcile the conflicting objectives of socialist and non-socialist politics. The earlier forced distinction between market and managed systems has broken down in almost all economies with most countries now operating on the basis of some balance between individual and collective interest and benefit.

This new doctrine would also be able to reconcile the conflicting focus of state-based realism and more ideological liberalism and neo-liberalism. The importance of the state as a principal actor in international relations is accepted (under realist theory) although this is balanced with the need for countries to operate within various inter-governmental organisations and frameworks and with other non-governmental bodies and parties (neo-liberalism). The overall objective and result would be more inclusive and collective rather than simply benefit or reward the interests of one particular country as against others. States must accept the need to surrender sovereign rights where this is in their interest and to work within larger co-operative frameworks where this is for their mutual or collective benefit.

(5) Market Close

In designing new governance or control systems, we have to balance the economic benefits of markets as against their inherent instability and need for some external regulation. Such intervention should nevertheless be kept to a minimum as far as possible. The immediate and private rewards of the market system must be balanced with the need to protect the public or collective interest and ensure that some fair and reasonable system of shared benefit is created. This can easily be achieved through revisions to the existing taxation and welfare provision systems within all countries.

A similar balance of interests has to be created between developed and developing nations to ensure that they can all operate in a fair and representative global marketplace. Appropriate controls must be placed on aggressive and abusive practices by multinational corporations with properly funded and targeted investment programmes being agreed at the same time as national markets are only opened up on a sequenced and managed basis.

We are aware of the limitations that can arise with the market system. All of this can nevertheless be managed and controlled through appropriate corrective action and agreed adjustment. We can then realise both the significant advantages and benefits as well as inherent limitations at the same time as mitigate the difficulties that can arise. In so doing, we can reward private endeavour and excellence at the same time as protect the interests of the less able or less fortunate.

Hopefully we can create a new global order based on common agreed principles and values that can benefit all of us. It only remains to be seen whether we have the necessary commitment and foresight to achieve these goals. The future remains to be made.

Author: G A WALKER

INTRODUCTION TO FINANCIAL MARKETS –
FINANCIAL FUNCTION, FINANCIAL REGULATION AND FINANCIAL FUTURE

1. FINANCIAL HISTORY
(1) Money
(2) Banking
(3) International Banking

2. FINANCIAL MARKETS
(1) Market Size
(1) Market Transformation
(3) Market Change
(4) Market Trends
(5) Market Capability

3. FINANCIAL ACTIVTIES
(1) Financial Function
(2) Financial Assets
(3) Financial Intermediation
(4) Financial Advantage
(5) Financial Crisis

4. FINANCIAL CONTROL
(1) Financial Risk
(2) Financial Regulation and Supervision
(a) Financial Regulation
(b) Financial Rules
(c) Conduct Rules
(d) Market Rules
(e) Market Support (LLR)

(3) Financial Theories or Objectives
(a) Banking Markets
(b) Securities Markets
(c) Insurance Markets
(d) Complex Groups and Financial Conglomerates
(e) Complex Regulatory Objectives

(4) Single Regulator
(5) Regulatory Reform

5. FINANCIAL OPPORTUNITY

(1) International Financial System
(a) Gold Standard 1816-1933
(b) Bretton Woods 1944-1973
(c) Petrol-Dollars and the Debt Crisis 1974-1989
(d) Asian and Russian Crises 1997-1998
(e) Credit Crisis 2007-2008
(2) Market Challenge
(3) International Market and Economic Development
(4) Market Value
(5) Market Clo