11/18/2011 06:31 pm ET | Updated Jan 17, 2012

Beating Global Regulators to the Finish Line

New regulations on both sides of the Atlantic have given the financial markets the shivers, as they worry about the repercussions. The Volcker Rule, the part of the Dodd-Frank Act that mandates banks stop proprietary trading activities, has been battered by financial market lobbyists, denigrated by the bulge bracket, and criticized by lawyers who say it is "too complicated."

On the other side of the pond, the Vickers Rule (actually Sir John Vickers' Report for the Independent Commission on Banking) will try to achieve the same result as Volcker but by "ring-fencing" prop trading activities within banks.

The U.S. government estimates that complying with the Volcker Rule will cost banks almost a billion dollars. Vickers estimates ring-fencing could cost a total of 4 to 7 billion pounds to implement. Expensive and time-consuming as these new regulations are there is mounting evidence that they are desperately needed -- and that they must go even further than their original mandates.

Why? Banks are not the only financial firms that need to be aware of trading risk and fraud, or that need to have the capital to operate if something goes wrong. Case in point is broker dealer MF Global; it fell outside the proposed Volcker and Vickers guidelines to separate proprietary trading risk from customer accounts. And is now bankrupt.

Although MF Global's customer money should have been ring-fenced and completely separate from any prop trading this was unfortunately not the case, and it caused the broker's downfall after it used client money to support a $6.4 billion sovereign debt position which had drained its meagre capital reserves.

The bankruptcy of MF Global gave Volcker and Vickers supporters some fresh ammo, and some pundits are now calling for them to apply the rules across financial firms in general. It also gives Basel III supporters a leg-up in calling for more stringent capital requirements.

Financial services firms can complain and lobby and fight against regulation, or they can put into place best practices and pip the regulators to the post. The ability to respond to both regulatory change and split-second market anomalies can make the difference between emerging from the global financial crisis as a leader, or as the firm that makes headlines when it goes bankrupt.

If firms behave proactively, rather than retroactively and reluctantly, putting compliance in control and implementing monitoring and surveillance technology, firms can protect themselves and their clients from market risks and not run afoul of shifting market regulations.

Because every firm is unique, banks and brokers need to customize their risk systems for 'red flags' and efficient incident investigations. By gaining visibility to potentially abusive and erroneous trading activities, with the flexibility to adapt to new trading patterns and regulations, they can quickly pinpoint threats and tailor responses without disruption, maintaining regulatory compliance now and into the future.

Banks and financial services firms are not far away from realizing that they need to think like regulators, taking control of internal surveillance and compliance before regulators make them do it.