Page 20 - FINAL CFA SLIDES DECEMBER 2018 DAY 13

LOS 44.l: Describe objectives of Session Unit 13:
market regulation., p.209 44. Market Structure & organisation

• Fraud and theft: In complex financial markets investment managers can take advantage of

unsophisticated investors. Furthermore, if returns are often random, it is difficult for investors to
determine if their agents (e.g., investment managers and brokers) are performing well.
• Insider trading: If investors believe traders with inside information will exploit them, they will exit the
market and liquidity will be reduced.
• Costly information: If obtaining information is relatively expensive, markets will not be as informationally
efficient and investors will not invest as much.
• Defaults: Parties might not honor their obligations in markets.

tanties
To solve these problems, market regulation should:

• Protect unsophisticated investors so that trust in the markets is preserved.
• Require minimum standards of competency and make it easier for investors to evaluate performance,

e.g. GIPS!
• Prevent insiders from exploiting other investors.
• Require common financial reporting requirements (e.g., IFRS).
• Require minimum levels of capital so that market participants will be able to honor their long-term
commitments. This is especially important for insurance companies and pension funds that individuals
depend on for their financial future. With capital at stake, market participants have more incentive to
be careful about the risks they take.