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Thursday, February 10, 2011

Some nice analogies describing regulation, commodities markets etc

During his talk at IIMA, Mr BC Khatua in his pithy style, explained abstract concepts with some superb examples which I'm reproducing below.
  1. Building of house analogy:- To build a proper house, the architect(regulator) needs to plan the layout well and in detail(legal structure/framework). But he cannot build the house himself. For that, he needs masons, plumbers, carpenters etc(market intermediaries ) whom he supervises(regulations). But he cannot himself monitor them always. So he prefers them to have some self monitoring(Self Regulatory Organizations-SROs like Stock Exchanges). For the plan to be achieved, all must work in tandem. Similarly, for a proper securities framework, the intermediaries are equally important and that is why they are 'governed' separately via licensing, fit and proper regulation etc
  2. Luggage free passenger analogy: An arbitrager or day trader do not keep any open positions at the end of the day(but profit on intra-day swings). This is similar to 9-5 luggage less travel!!
  3. Infant analogy:- The FMC though nearly 60yrs old has not developed like SEBI/RBI due to Govt control/market conditions. For it to become as effective a regulator, it needs to be nourished/fed like how SEBI was in 1992(via autonomy, powers etc). My take on this is that the securities scam hastened the formation of SEBI but no such thing has happened to speed up the transfer of powers to the FMC
  4. Long/Short analogy:-A farmer is 'long farming' from the time he sows his seeds, but he is short only on the day he sells. It is for us to ensure that he gets more platforms/time to execute his short position and earn more. Giving post harvest credit will dilute the financial pressure to sell at throwaway prices at the mandi. Encouraging competing channels with mandis could improve the realization at the farm gate without increasing the customer's food bill. 

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