When the Obama administration releases a framework for reform of US financial regulation on Wednesday – accompanied by announcements in the European Union and other financial centres – it will be the first step in the most significant regulatory overhaul since the Great Depression. As proposals give way to the rough-and-tumble of the legislative process, lawmakers should be mindful of certain core principles that are integral to the fair and efficient functioning of financial markets.

Now is the time to overhaul the financial regulatory structure. Simply put, the current system failed to identify systemic risks, much less manage them. It proved incapable of protecting investors or even recognising the magnitude of the threat they faced. It is a system characterised by confusing overlaps in some areas and perilous gaps in others.