Finance

Chinese Wall

Chinese Wall

The term Chinese wall is very popular in the business community which can be described as a non-existing wall that prevents the transfer of information from one department to another. In the United States, corporations, investment firms, brokerage firms, and retail firms have used the Chinese wall to keep confidentiality and to prevent conflict of interest. The wall is not physical but ethical, aimed at prohibiting the exchange of information that may lead to ethical or legal infringements.

Get complete CFA Online Course by experts Click Here

The Chinese wall is used in a wide variety of professions and industries like law, journalism, insurance, computer science but is specially used in the financial service sector. Over the years, large financial institutions have used it to self-regulate their business dealings to create ethical standards between departments however these have not been very effective. The Securities and Exchange Commission (SEC) has come up with regulations on how the financial institutions must share information. The SEC has started to charge fines, penalties, and also take legal action.

Chinese Wall

How Does It Work?

  • Building a Chinese wall in investment companies is very common these days and is also considered important.
  • Investment bankers often have the access to non-public information through their clients which concerns the public traded companies or those companies which are about to become public through the initial public offering (IPO).
  • Investment bankers are responsible for developing barriers that will prevent confidential information from being shared with other departments in the same bank.
  • In order to prohibit the companies from combining banking, insurance, and investing the Gramm Leach Bliley Act of 1999 (GLBA) was introduced from which the use Chinese wall became critical.
  • When investment bankers engage in potential unannounced transactions, they must make it very clear to the clients that such confidential information must not be given to the bank employees.

Advantages:

  • If there are Chinese walls in an organization then it shows that the information obtained is not by insider trading.
  • The organization can contribute to market integrity and prevent market conflicts provided they are determined to do so.
  • The market abuse regulation gives an opportunity for some share buyback program if the Chinese wall is implemented in the firm

 

Chinese Wall

Get complete FRM Online Course by experts Click Here

Disadvantages:

  • Chinese walls prevent sharing information from one department to the other but fail to prevent purposeful misconduct and conspiracies to share insider information.
  • It won’t be able to prevent classic insider trading rather than a breach of the Chinese wall.
  • It does not allow the various departments to come together and work as one unit.

Bottom Line:

The stock market crash of 1929 created huge havoc all around the world hence a solution needed to be found, for which the “Chinese wall” was the solution in order to create a distinction between the brokers and investment bankers. They are a core aspect of Investment banking best practices and adherence.

Author -Sanjana Rau

About the author- Started my journey of self even when the odds were against me, keen observation, a cool temper, and sports worked the best for me.

Related:

Insider Trading

Major Risks faced by the Banks

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *

1 × two =