Law Commons^™

International Financial Standards And The Explanatory Force Of Lex Mercatoria, Cally Jordan

Faculty Papers & Publications

The global financial crisis has cast a strong light on some hitherto obscure corners of the financial world, provoking an outpouring of calls for concerted international action. “Hard law” having disappointed, can “soft law”, in the form of international financial standards, substitute for traditional national legislation. This article examines some of the difficulties associated with the “international standards as soft law” discourse.

First of all, conceptual problems in the “soft law” discourse itself reveal profoundly different patterns of legal thought cutting across national boundaries, resulting in different understandings of international financial standards. Secondly, recent experience, over the past decade, with …

Structured Notes Fiasco In The Courts: A Study Of Relevant Judgments In Taiwan Between 2009 And 2010, Christopher Chao-Hung Chen

Christopher Chao-hung CHEN

The purpose of this article is to analyse relevant judicial decisions in Taiwan regarding structured notes sold to retail investors. Regarding pre-sale disputes, one issue was that investors failed to read contractual documents properly before signing contracts, so there was a question whether they could later claim a bank’s violation of its duty to explain. This article favours the view that an investor’s signature may exempt a bank’s duty, provided that investors are made aware of relevant warnings. In addition, for suitability assessment, relevant judgments show that customers were too easily classified as active investors based on a simple questionnaire. …

Information Disclosure, Risk Trading And The Nature Of Derivative Instruments: From Common Law Perspective, Christopher Chao-Hung Chen

Christopher Chao-hung CHEN

This paper explores issues of pre-contractual disclosure for derivative instruments, of which this paper describes as contracts to trade risks, in the UK and US. While there is no general duty of disclosure in common law, this paper focuses on whether there should be a duty of disclosure for derivative instruments by comparing with securities law and insurance law. This paper argues that mandatory disclosure in the securities market cannot be extended to exchange-traded futures contracts (save where securities are involved) because of the nature of securities. In addition, this paper argues that derivative instruments, though similar to insurance in …

A Comparison Of Anti-Manipulation Rules In U.S. And Eu Electricity And Natural Gas Markets: A Proposal For A Common Standard, Shaun D. Ledgerwood, Dan Harris

Shaun D. Ledgerwood

In this paper, we describe the development and current status of anti-manipulation rules as they apply to wholesale electricity and natural gas markets in the United States and the European Union, including the institutions that are responsible for overseeing these rules. We then compare and contrast these jurisdictions to discuss similarities, differences, and potential gaps in coverage within and across their internal markets. We note that while the behavior prohibited by the U.S. and EU statutes is remarkably similar, there is in fact no common standard for defining market manipulation. The absence of a common EU/U.S. framework for examining manipulative …

The Extraterritorial Provisions Of The Dodd-Frank Act Protects U.S. Taxpayers From Worldwide Bailouts, Michael Greenberger

Michael Greenberger

The significant extraterritorial scope of the derivatives regulation within the Dodd-Frank Wall Street Reform and Consumer Protection Act promises to foster rigorous international standards for financial regulation that will restore transparency and stability to the global derivatives market. At present, that market exceeds $700 trillion notional value, or over ten times the world GDP. Despite opposition from Wall Street to the present extraterritorial application of almost all of Dodd-Frank’s derivatives regulation, the plain language of the statute requires implementing that regulation on an appropriate extraterritorial basis in order to protect U.S. taxpayers from bailing out financial institutions engaging in foreign …

Implementing Dodd-Frank: A Review Of The Cftc‟S Rulemaking Process: Testimony, Michael Greenberger

Michael Greenberger

The Relationship of Unregulated OTC Derivatives to the Meltdown. It is now accepted wisdom that it was the non-transparent, poorly capitalized, and almost wholly unregulated over-the-counter (“OTC”) derivatives market that lit the fuse that exploded the highly vulnerable worldwide economy in the fall of 2008. Because tens of trillions of dollars of these financial products were pegged to the economic performance of an overheated and highly inflated housing market, the sudden collapse of that market triggered under-capitalized or non-capitalized OTC derivative guarantees of the subprime housing investments. Moreover, the many undercapitalized insurers of that collapsing market had other multi-trillion dollar …

Diversifying Clearinghouse Ownership In Order To Safeguard Free And Open Access To The Derivatives Clearing Market, Michael Greenberger

Michael Greenberger

Implementing the rigorous governance and ownership standards established in the Dodd-Frank Wall Street Reform and Consumer Protection Act3 for derivatives clearing organizations (DCOs) will promote free and open access to clearing and reduce systemic risk within what is now the $700 trillion notional value derivatives market. Such standards are central to and advance the key regulatory tenants of Dodd-Frank: i.e., to restore transparency, capital adequacy, and accountability to what was the unregulated over-the-counter (OTC) derivatives market by ensuring that swaps are cleared through financially sound DCOs. Also, these rules will promote competition by curtailing large swap dealers‘ (SDs) control over …

Structured Notes Fiasco In The Courts: A Study Of Relevant Judgments In Taiwan Between 2009 And 2010, Christopher Chao-Hung Chen

Research Collection Yong Pung How School Of Law

The purpose of this article is to analyse relevant judicial decisions in Taiwan regarding structured notes sold to retail investors. Regarding pre-sale disputes, one issue was that investors failed to read contractual documents properly before signing contracts, so there was a question whether they could later claim a bank’s violation of its duty to explain. This article favours the view that an investor’s signature may exempt a bank’s duty, provided that investors are made aware of relevant warnings. In addition, for suitability assessment, relevant judgments show that customers were too easily classified as active investors based on a simple questionnaire. …

The Big Banks: Background, Deregulation, Financial Innovation And Too Big To Fail, Charles W. Murdock

Charles W. Murdock

Summary: The Big Banks: Background, Deregulation, Financial Innovation and Too Big to Fail

The U.S. economy is still reeling from the financial crisis that exploded in the fall of 2008. This article asserts that the big banks were major culprits in causing the crisis, by funding the non-bank lenders that created the toxic mortgages which the big banks securitized and sold to unwary investors. Paradoxically, banks which were then too big to fail are even larger today.

The article briefly reviews the history of banking from the Founding Fathers to the deregulatory mindset that has been present since 1980. It …

An Altered Derivatives Marketplace: Clearing Swaps Under Dodd-Frank, Eduard H. Cadmus

Fordham Journal of Corporate & Financial Law

Though over a year has passed, the impact of the Dodd Frank Act remains unclear. This Note examines the provisions of the Act that relate to swap transactions within the context of pre-reform and postreform markets. In order to reduce the uncertainties inherent in unregulated swap transactions, the Act employs a comprehensive framework, which includes mandatory clearing through derivative clearing organizations, extensive reporting requirements, margin requirements, and position limits. This Note argues that, in doing so, the Dodd Frank Act addresses the fundamental failures of pre-reform derivative markets. However, the importance of the role for derivative clearing organizations under this …

The Extraterritorial Provisions Of The Dodd-Frank Act Protects U.S. Taxpayers From Worldwide Bailouts, Michael Greenberger

Faculty Scholarship

The significant extraterritorial scope of the derivatives regulation within the Dodd-Frank Wall Street Reform and Consumer Protection Act promises to foster rigorous international standards for financial regulation that will restore transparency and stability to the global derivatives market. At present, that market exceeds $700 trillion notional value, or over ten times the world GDP. Despite opposition from Wall Street to the present extraterritorial application of almost all of Dodd-Frank’s derivatives regulation, the plain language of the statute requires implementing that regulation on an appropriate extraterritorial basis in order to protect U.S. taxpayers from bailing out financial institutions engaging in foreign …

Forward Contracts Preference Exception Broadly Construed, Brian King

Bankruptcy Research Library

(Excerpt)

Derivative transactions and financial contracts are a critical component of the United States economy. There are three main types of derivative contracts executed in our markets: futures, options and forward contracts. Each of these instruments derives value from an underlying security or resource with focus on a possible change in its future value. These instruments can be used as speculative investments, as hedges on securities already owned, or as a means of mitigating risk on volatility within a specific industry. An essential attribute of trading in these derivatives is “the ability of the parties to value their transaction on …

Governing Systemic Risk: Towards A Governance Structure For Derivatives Clearhouses, Sean J. Griffith

Faculty Scholarship

Derivatives transactions create systemic risk by threatening to spread the consequences of default throughout the financial system. Responding to the manifestations of systemic risk exhibited in the financial crisis, policy-makers have sought to solve the problem by requiring as many derivatives transactions as possible to be “cleared” (essentially guaranteed) by a clearinghouse. The clearinghouse will centralize and, through the creation of reserve accounts, seek to contain systemic risk by preventing the consequences of default from spreading. This centralization of risk makes the clearinghouse the new locus of systemic risk, and the question of systemic risk management thus becomes a question …

Transaction Consistency And The New Finance In Bankruptcy, David A. Skeel Jr., Thomas Jackson

All Faculty Scholarship

Prior to the enactment of the Dodd-Frank Act last summer, derivatives and repurchase agreements (“repos”) were largely unregulated outside of bankruptcy, and also were exempted from core bankruptcy provisions such as the automatic stay, which prevents creditors from seizing collateral or attempting to collect what they are owed. The Dodd-Frank Act now extensively regulates derivatives outside of bankruptcy, but it left their special treatment in bankruptcy completely untouched.

There is a gap in the debate over this special treatment. To date, neither scholars nor the derivatives industry have fully analyzed the key counterfactual: what would happen if derivatives and repos …

Credit Risk Transfer Governance: The Good, The Bad, And The Savvy, Houman B. Shadab

Articles & Chapters

Goldman Sachs and American International Group on the eve of the 2008 financial crisis were bound together through a web of credit risk transfer (CRT) contracts in the form of credit default swaps (CDSs) and synthetic collateralized debt obligations (CDOs). Synthetic CDOs enabled certain hedge funds to profit from the ultimate bursting of the housing bubble due to the funds’ savvy in understanding CRT better than their counterparties. This Article constructs a novel theory of CRT that extends the insights of creditor governance theory to CRT transactions. By doing so, this Article establishes a framework for good CRT governance. CRT …

Insuring Against A Derivative Disaster: The Case For Decentralized Risk Management, Jeffrey Manns

GW Law Faculty Publications & Other Works

This Article makes the case for a decentralized risk management strategy for identifying and defusing future bubble markets. It suggests how the government can enlist private "gatekeeper guarantors" to provide integrated insurance and monitoring roles to complement the government’s management of systemic risks. It proposes the enactment of a federal mandate that systemically significant financial entities (or participants in systemically significant financial sectors) secure private guarantees to cover a percentage of their potential liabilities (above a loss threshold). Gatekeeper guarantors would act as “circuit breakers” of systemic risk by serving as self-interested monitors of risk taking and tying clients’ coverage …

Reforming Derivative Taxation, Alex Raskolnikov

Faculty Scholarship

This brief essay outlines three benchmarks for evaluating alternative ways of taxing capital income, summarizes anticipatory, retroactive, and accrual-based proposals for reforming the taxation of derivatives, and offers guidelines for evaluating more limited reforms. It is intended as an introduction to key concepts, tensions, and ideas for reforming the taxation of financial instruments.