Page 27 - FINAL CFA II SLIDES JUNE 2019 DAY 4

LOS 13.f: Explain purposes in regulating READING 11: CURRENCY EXCHANGE RATES: UNDERSTANDING EQUILIBRIUM VALUE
commerce and financial markets.

MODULE 12.3: GROWTH AND CONVERGENCE THEORIES

Regulating commerce: Provide an essential framework to facilitate business decision making (company laws, tax laws, contract laws, competition laws,
banking laws, bankruptcy laws, and dispute resolution systems, GATT)

Regulating financial markets: Include regulation of securities markets and regulation of financial institutions (helps prevent failures of the financial system;
the objectives of securities regulations include three interrelated goals: protecting investors, creating confidence in the markets, and enhancing capital
formation.

REGULATION OF SECURITY MARKETS: Ensuring the fairness and integrity of capital markets:
•Disclosure requirements, directed towards mitigating agency problem –by imposing fiduciary duties of directors; focused on protecting small (retail) investors, hence the
relatively lax regulatory coverage of hedge funds and private equity funds that are marketed only to qualified investors.

REGULATION OF FINANCIAL INSTITUTIONS: Prudential supervision -monitoring and regulation to reduce system-wide risks and to protect investors as failure of
one financial institution can have a far-reaching impact and may result in a loss of confidence. Due to high mobility of capital across the developed world, shocks in one
part of the system can affect the whole system, leading to global contagion.

The cost-benefit analysis of financial market regulations should also include hidden costs. For example, FDIC insurance for banks may provide excessive risk-taking
incentives for banks (a moral hazard problem).

LOS 13.g: Describe anticompetitive behaviors targeted by antitrust laws globally and evaluate the antitrust risk associated with a given business strategy.

Work to promote domestic competition by monitoring and restricting activities that reduce or distort competition.
Regulators often block a merger that leads to excessive concentration of market share.

Anticompetitive behavior such as discriminatory pricing, bundling, and exclusive dealing is often also prohibited.

Internationally, companies need to evaluate their product and marketing strategies in the context of multiple (and varying) regulatory regimes. For
example a multinational company may be subject to U.S. antitrust laws as well as to EU antitrust laws.
When evaluating an announced merger or acquisition, an analyst should consider the anticipated response by regulators as part of the analysis.