Friday, October 03, 2008

Mark to Market

Politics and Economics

There have been a number of calls by politicians around the world for an end to the financial practice of "mark-to-market".

Defenders of the practice try to explain that "mark-to-market" simply means taking latency out of the accounts of individual companies, and improves overall transparency. ["Mark-to-market" accounting fight goes down to the wire]

Opponents of the practice point to its effect in amplifying the recent catastrophic falls in share values, particularly banks. European politicians (including David Cameron and Nicolas Sarkozy) have suggested the practice should be suspended or modified [Sarkozy seeks change to fair value rules, Nicolas Sarkozy's mission impossible?] and the US Senate has now given the SEC powers to suspend mark-to-market.

Financial regulations based on the mark-to-market principle were introduced after Enron. [Enron-era accounting reforms blamed in financial crisis] Some politicians (including Mark Sanford) have pointed out a troubling pattern of yesterday's solutions causing today's problems. [A Bailout for All Our Bad Decisions?]

Implications for SOA

Some SOA champions in the financial sector have seen the elimination of latency as one of the critical benefits of SOA. These benefits might now seem contingent and short-term rather than fundamental and lasting. Solving one set of problems, but contributing to new problems.

There is now a real possibility that regulators may impose new and more complicated valuation rules for complex financial assets. If SOA has been correctly implemented, then plugging new valuation rules into existing applications will be a fairly quick and painless procedure. However, if it turns out that the service-oriented architecture needs radical restructuring to accommodate such changes, then this might indicate that the SOA applications weren't correctly architected in the first place.

SOA was supposed to make business more capable of withstanding change. So are banks with a decent service-oriented architecture now in a (slightly) better position to weather the catastrophe? Perhaps we shall soon find out.

Biographical Notes

  • David Cameron is the leader of the UK Conservative Party.
  • Nicolas Sarkozy is the President of France, and former leader of the centre-right UMP party.
  • Mark Sanford is the Republican Governor of South Carolina.

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