Handling conflicts of interest within financial innovation. The case of regulation and supervision of Bermuda sidecars

Publication Date09 Oct 2009
Pages353-363
DOIhttps://doi.org/10.1108/13590790910993762
AuthorWilliam Kattan,Wendy King,Marcelo Ramella
subjectMatterAccounting & finance
Handling conflicts of interest
within financial innovation
The case of regulation and supervision
of Bermuda sidecars
William Kattan, Wendy King and Marcelo Ramella
Bermuda Monetary Authority, Hamilton, Bermuda
Abstract
Purpose – The purpose of this paper is to describe the experience of a financial services regulator,
the Bermuda Monetary Authority (BMA), in identifying and dealing with conflicts of interest in
innovative financial markets and involving sophisticated counterparties.
Design/methodology/approach – The paper draws on Bermuda legislation and regulations in
force, on corporate records, produced by the BMA, documenting its structure, policies, and procedures
in place to identify and manage conflicts of interest, as well as on observation of current corporate
practices in this respect. In addition, background and contextual information on Bermuda reinsurance
market relies on secondary sources describing and analyzing it.
Findings – The paper argues that the BMA has approached the issue of identification and treatment
of conflicts of interest within a highly innovative environment involving sophisticated counterparties
through two key strategies. First, it has concentrated its regulatory and supervisory efforts and
resources at the “entry” stage of the process (e.g. licensing of financial entities). Second, the BMA has
drawn on its knowledge of, and partnership with, the close-knitted network of financial services
stakeholders operating in Bermuda.
Originality/value – This paper is of value to those wishing to explore and better understand
conflicts of interest involving sophisticated financial counterparties, and the role of the regulator in
identifying and managing them, especially within the dynamics of innovative markets.
Keywords Financial services,Regulation, Innovation,Conflict resolution, Bermuda
Paper type Case study
1. Introduction
A key feature in the process of growth of global financial markets has been a steep
increase in complexity brought about, among other things, by the many innov ative
mechanisms and instruments that have repeatedly blurred the boundaries between
financial sectors. Innovative financial products and practices have more often than not
generated new linkages among financial agents in different financial sectors.
For example, the past 12 years have witnessed a steady growth in cross-sectoral risk
transfer between reinsurance and capital markets (Cummins, 2008). Novel , and more
complex, inter-relations have a wide variety of consequences. On the one hand, for
example, they may enable and promote efficiency in the allocation of resources. On the
other hand, new connections often bind agents with competing interests, with differing
degrees of access to information as well as dissimilar levels of understanding
of this information. More often than not, cross-sectoral risk transfer is brought about
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1359-0790.htm
The views expressed in this paper are the authors’ own and do not necessarily reflect the views
of the BMA
Regulation of
Bermuda
sidecars
353
Journal of Financial Crime
Vol. 16 No. 4, 2009
pp. 353-363
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590790910993762

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