Intermediated securities holding infrastructure an avant - garde system jeopardised by the usual suspects

This study deals with two important and contemporary phenomena at the heart of the financial markets and the policymaking process i.e. (i) the policymaker’s role on the critical features of the intermediated holding infrastructure that exacerbate securities shortfall; and (ii) the purposeless effect of policymaking. The main aims of this study are to contribute to the deficient awareness on the former and provide a long-needed framework of analysis for the latter, which represent also the originality and the significance of this study.

The intermediated securities holding system is a financial market infrastructure: (i) operated by intermediaries (banks and other financial firms and market infrastructures), and (ii) where the securities are acquired, held and disposed of in book-entry (electronic) form with the intermediation of such a party. This is a fundamental but technical and silent aspect of the financial markets understood by a few people who are experts on the subject. The modern shape of the intermediated holding infrastructure has been determined not only by its private players but also substantially by the policymaker. We have observed several characteristics of the system, reinforced by the policymaker, that deserve continuous scrutiny in terms of investor protection such as the infrastructure complexity, lack of system transparency, asymmetric advantage of intermediaries, risky proliferation of the asset reuse chain and complex investor protection regimes to name a few. We argue that these critical characteristics contribute to a system difficult to be understood and disciplined by the investor and which is vulnerable to securities shortfall. The shortfall is ultimately born by the investor directly or as a taxpayer indirectly, in the case of severe shortfalls in the system that require bailout or bail-in intervention, an outcome that defies the primary purpose of the policymaker’s intervention in the infrastructure i.e. investor protection.

The main result stemming from the above observation is that we may be dealing with a typical case of the purposeless effect of policymaking on the infrastructure i.e. consequences that defy the very purpose of the acts that influenced such consequences. To our dissatisfaction, however, the existing literature suffers from the lack of a proper framework for analysing the purposeless consequences of policymaking and the inherent factors that lead to such consequences (the “usual suspects”). In the second part of this study we fill this gap by developing such a framework. For this purpose we have borrowed R.K. Merton’s framework for analysing the problematic consequences of social action (1936) and whose traces can be found unacknowledged though deeply embedded in the more contemporary theories. This framework consists in a typology of the inherent factors that produce unanticipated consequences such as lack of information, error, imperious immediacy of interest, basic values and self-fulfilling and self-defeating prophecy. We have extended this framework to include the intentional aspect of the action and have enriched it with persuasive insights from various disciplines, such as information asymmetry, behavioural biases, capture theory, laissez-fare and paternalistic ideologies of policymaking and performativity to name a few. As a result we offer a comprehensive, balanced, strong, contemporary, multidisciplinary and promising framework for analysing the purposeless consequences of policymaking in general, including on the intermediated holding infrastructure in particular. Ultimately, due to its general applicability, the framework provides a common theoretical and practical ground for the hypothesis, debates and applications on various actors’ behaviour to take place, the suitability and the review of the policymaking process being only one of them.