[R]egulators must have the ability to flexibly interpret and respond to changing conditions in the financial markets and the businesses of their regulatees.5 The relentless, rapid evolution of finance requires that financial regulation be principle-based, not rule-based. Reformed quant Emanuel Derman makes the case persuasively that we cannot understand financial markets using rigidly codified models. If that is true, how, then, can we ever hope to regulate them with framework based on rigid, over-codified rules? No points for guessing: we can’t.
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