87507 - Foundations of Risk Regulation in Financial Markets

Learning outcomes

The course offers a review of market failures in financial markets and underlying economic theories, such as moral hazard, adverse selection and cognitive biases. The course then puts theories in practice by analyzing the economic foundations of building blocks of financial market regulations and institutions, including the recent European banking union, capital markets union reforms and risk regulations for central counterparty clearing houses (CCPs). Students will be able to understand the rationale of risk policies in financial markets, how to identify a market failure and devise intervention.,The course offers a review of market failures in financial markets and underlying economic theories, such as moral hazard, adverse selection and cognitive biases. The course then puts theories in practice by analyzing the economic foundations of building blocks of financial market regulations and institutions, including the recent European banking union, capital markets union reforms and risk regulations for central counterparty clearing houses (CCPs). Students will be able to understand the rationale of risk policies in financial markets, how to identify a market failure and devise intervention.

Course contents

Introduction to risk regulation (approx. 7 hours)

• Basic notions of financial markets functioning and institutions
• Basic notions of EU financial governance and institutions
• Theories of efficient markets
• Transaction costs and market failures
• Bounded rationality theories
• Theories of regulatory intervention and objectives of financial regulation

Risk regulation in financial markets (approx. 23 hours)

• Financial market functioning and the role of analysts and information regulation
  
• Market abuse and disclosure rules
• Market microstructure, trading venue classification and other market infrastructure rules
• OTC derivatives markets and post-trade regulation
• Asset management regulation
• Investment service provision and retail investor protection
• Principles of sustainable finance regulation
• Distributed ledger technology and regulation

The course does not cover principles of micro and macroprudential regulation, which will be covered by other courses in the Master programme.

Readings/Bibliography

See online learning platform (IOL).

Teaching methods

Each lecture will combine the theoretical framework with practical examples to show how that framework applies to financial markets and their regulations. The lecturer will invite the class to actively participate and debate. Slides and materials will be made available beforehand (where possible). Contributions by guest lecturers will enrich the programme with more in-depth analyses.

Assessment methods

Assessment is based on:

1. Class participation (10%)

2. Group work (in the form of essay and presentation) (40%)

3. Final exam (50%).

The assessment of class participation aims at evaluating the ability to contribute to the debate with meaningful questions and interesting points.

The Group work aims at evaluating student's ability to identify market failures, to justify the need for regulatory intervention, to devise different options for policy intervention.

The final online exam is a list of 31 closed-ended questions (the 31st for the distinction) to be answered in 45 minutes. The written exam evaluates the understanding of the theoretical models, as well as how these theoretical models are implemented in existing financial markets regulations.

The student must get the passing grade (18/30) in all three assessments to receive their final mark for this course.

Teaching tools

Lecture slides with links to reading materials

Other reading material

Interactive discussions during class (also with external guests)

Office hours

See the website of Diego Valiante