Regulatory Arbitrage

AAA

DEFINITION of 'Regulatory Arbitrage'

A practice whereby firms capitalize on loopholes in regulatory systems in order to circumvent unfavorable regulation. Arbitrage opportunities may be accomplished by a variety of tactics, including restructuring transactions, financial engineering and geographic relocation. Regulatory arbitrage is difficult to prevent entirely, but its prevalence can be limited by closing the most obvious loopholes and thus increasing the costs associated of circumventing the regulation.

INVESTOPEDIA EXPLAINS 'Regulatory Arbitrage'

An interesting example of regulatory arbitrage came from Blackstone's 2007 IPO. In an unusual move, Blackstone went public as a master limited partnership in an effort to avoid the higher tax rates imposed on corporations. In order to retain these tax advantages, Blackstone also had to avoid classification as an investment company. Through carefully negotiating the tax regulations, Blackstone hopes to exploit a 'regulatory arbitrage' between the tax code's legal definitions and economic substance.

RELATED TERMS
  1. Tax Arbitrage

    The practice of profiting from differences between the way transactions ...
  2. Risk Arbitrage

    A broad definition for three types of arbitrage that contain ...
  3. Statistical Arbitrage

    A profit situation arising from pricing inefficiencies between ...
  4. Market Arbitrage

    Purchasing and selling the same security at the same time in ...
  5. Arbitrage

    The simultaneous purchase and sale of an asset in order to profit ...
  6. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies ...
RELATED FAQS
  1. How should a whistleblower report unlawful or unethical behavior?

    Whistleblowing takes many forms. A whistleblower could expose government corruption, expose unethical business behavior or ... Read Full Answer >>
  2. What is the government's role and what is the private sector's role in neoliberalism?

    Neoliberalist economic theory supports minimization of government intervention and laissez-faire policy. Neoliberalism is ... Read Full Answer >>
  3. Are so-called self-offering and self-management covered by "Financial Instruments ...

    As the Financial Services Agency (FSA) explains, self-offering of interests in collective investment schemes falls under ... Read Full Answer >>
  4. How did the Dodd-Frank Act change whistleblower protection and processes?

    In 2010, the Dodd-Frank Act strengthened and expanded the existing whistleblower program promulgated by the Sarbanes-Oxley ... Read Full Answer >>
  5. What is the minimum capital adequacy ratio that must be attained under Basel III?

    Under Basel III, the minimum capital adequacy ratio that banks must maintain is 8%. The capital adequacy ratio measures a ... Read Full Answer >>
  6. Who controls the Federal Reserve Bank?

    The Federal Reserve Bank was created by an act of the U.S. Congress in 1913, but the executive and legislative branches do ... Read Full Answer >>
Related Articles
  1. Credit & Loans

    Credit Card Arbitrage: Free Money Or Dangerous Gamble?

    Credit card arbitrage is a way to make some money, but it's a major gamble with devastating risks.
  2. Bonds & Fixed Income

    Cashing In On Corporate Restructuring

    Companies use M&As and spinoffs to boost profits - learn how you can do the same.
  3. Options & Futures

    Trading The Odds With Arbitrage

    Profiting from arbitrage is not only for market makers - retail traders can find opportunity in risk arbitrage.
  4. Options & Futures

    Trade Smarter With Equivalent Positions

    Understanding the concept of equivalent positions will help you trade more efficiently and save money on trade fees.
  5. Options & Futures

    Hedge Funds Hunt For Upside, Regardless Of The Market

    Hedge funds seek positive absolute returns, and engage in aggressive strategies to make this happen.
  6. Insurance

    Why Is Health Care So Expensive In The Us?

    The U.S. is the world leader in only one area of health care: costs. Why is it so hard to rein in these expenses?
  7. Economics

    The Most Likely Outcome For Greece

    After more than five years of a Greek drama, most of us have become fatigued with hearing about Greece’s debt problems, the one issue that won’t go away.
  8. Economics

    Explaining the Reserve Ratio

    Reserve ratio is the amount of cash a bank must keep in its bank vaults or deposit into a central, governing bank.
  9. Economics

    Understanding Austerity

    Austerity is an economic term describing government measures to reduce and eliminate budget deficits.
  10. Insurance

    Is My Health Insurance Good In Another State?

    Under ACA, is health care insurance something you can take with you state to state?

You May Also Like

Hot Definitions
  1. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  2. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  3. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  4. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
  5. International Monetary Fund - IMF

    An international organization created for the purpose of: 1. Promoting global monetary and exchange stability. 2. Facilitating ...
  6. Risk-Return Tradeoff

    The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!