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Editorial: The temptation of the regulators

Every time a scandal hits the international financial markets, politicians and the press scream for tighter regulation.

This happened most vociferously with the spate of derivatives losses in 1994, culminating in the case brought by Procter and Gamble against Bankers Trust. For a time, it looked as though, in the US at least, laws would be introduced to clamp down on the use of derivatives.

That threat passed. Indeed, the derivatives market has proved that it works very efficiently, given all the risks inherent in it. Large losses by end-users have been surprisingly rare.

The regulators' eye has now turned to the commodities market, in the light of the losses incurred by Sumitomo Corporation in copper. A consensus has already formed that the London Metal Exchange lacks transparency, is riddled with dodgy practices and, therefore, needs to be regulated.

But the regulators, before they act too hastily, need to remember what is the purpose of regulation. It is, most obviously, to protect inexperienced investors, particularly individuals. But second, more controversially, it is to encourage the growth and efficiency of markets by stamping out inappropriate practices. An exchange which users are wary of because its methods are inefficient or untrustworthy, will wither away.

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