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

Learning outcomes (UPDATED)

The course reviews theories of market failures in financial markets, such as moral hazard, adverse selection and bounded rationality theories. The course then puts theories in practice by analysing the economic and legal foundations of building blocks of financial market regulations and institutions, including risk regulations for investment firms, market infrastructure and blockchain technology. Students will be able to identify market failures, understand the rationale of key risk regulations in financial markets and devise regulatory intervention.

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)

• The Better Regulation Framework with focus on Impact Assessment
• 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
• Principles of distributed ledger technology regulation

The course does not cover principles of prudential 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 policy-making. The lecturer will invite the class to actively participate and debate. Slides and materials will be made available beforehand (where possible).

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 policy options and to select the best option.

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 theoretical models, as well as how these theoretical models are implemented in actual risk regulations across financial markets.

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

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