Thursday, March 15, 2007

Chinese Wall

Definition :
  1. a fortification 1,500 miles long built across northern China in the 3rd century BC; is 1,500 miles long and averages 6 meters in width
  2. A barrier, especially one that seriously hinders communication or understanding. ["still believe a Chinese wall can exist between public and private selves"]
  3. In business, Chinese Wall is a barrier against information flows between different divisions or operating groups within banks and securities firms. Examples include a policy barrier between the trust department from making investment decisions based on any substantive inside information that may come into the possession of other bank departments. The term also refers to barriers against information flows between corporate finance and equity research and trading operations.
Potential phrase origins

The term Chinese wall is said to have originated after the catastrophic stock market crash of 1929, when the largely unregulated United States market suffered a 40% drop between September and October. According to one theory, the crash resulted from inflated stock values created by price manipulation and insider trading. After the crash, Congress passed a law mandating the separation of commercial and investment banks, in an attempt to prevent conflict of interest. Rather than enforcing physical or corporate separation, however, the law only mandated that policies must be in place to create a logical division between these segments.

Chinese wall is usually said to be a reference to the Great Wall of China, erected over 2000 years ago to protect inhabitants from invaders. However, other theories exist. In a Wikipedia entry, for example, the author argues that the term probably derives from a diplomatic contrivance of the Late Imperial period in China: "...if a junior mandarin saw a senior mandarin on the road he was expected to bow and present his compliments. In Beijing this tended to happen quite a lot and so traffic was frequently blocked. Instead mandarins came up with a method of pretending they did not see each other on the road by the clever placing of a retainer with an umbrella. Because they did not "see" each other, they were not obliged to stop." (~excepts from whatis.com)

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