Law Commons^™

Extraterritorial Financial Regulation: Why E.T. Can't Come Home, John C. Coffee Jr.

Faculty Scholarship

This Essay begins with a deliberately off-putting title: extraterritorial financial regulation. Old-time "conflict of laws" scholars would call this an oxymoron, pointing to recent Supreme Court decisions – most notably, Morrison v. National Australia Bank Ltd. and Kiobel v. Royal Dutch Petroleum Co. – that have applied a strong presumption against extraterritoriality to curb the reach of U.S. law. Even those international law scholars who are sympathetic to the regulation of multinational financial institutions might prefer to avoid this term and talk instead of "global financial regulation" because they conceptualize international financial regulation as implemented through networks of cooperating multinational …

The Federal Reserve's Supporting Role Behind Dodd-Frank's Clearinghouse Reforms, Colleen M. Baker

Journal Articles

This Article analyzes the Federal Reserve’s expanded role in payment, clearing, and settlement systems, particularly in connection with certain clearinghouses that have been designated by the newly created Financial Stability Oversight Council as “systemically significant.” The Federal Reserve’s expanded role is a little understood, but critical supporting component of domestic and international regulatory reforms to the $639 trillion over-the-counter (OTC) derivative markets. These reforms mandate the increased use of clearinghouses in OTC derivative markets. Due to critical reforms in Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Federal Reserve is now positioned to …

Complexity, Innovation, And The Regulation Of Modern Financial Markets, Dan Awrey

Cornell Law Faculty Publications

The intellectual origins of the global financial crisis (GFC) can be traced back to blind spots emanating from within conventional financial theory. These blind spots are distorted reflections of the perfect market assumptions underpinning the canonical theories of financial economics: modern portfolio theory, the Modigliani and Miller capital structure irrelevancy principle, the capital asset pricing model and, perhaps most importantly, the efficient market hypothesis. In the decades leading up to the GFC, these assumptions were transformed from empirically (con)testable propositions into the central articles of faith of the ideology of modern finance: the foundations of a widely held belief in …

Derivatives And The Legal Origin Of The 2008 Credit Crisis, Lynn A. Stout

Cornell Law Faculty Publications

Experts still debate what caused the credit crisis of 2008. This Article argues that dubious honor belongs, first and foremost, to a little-known statute called the Commodities Futures Modernization Act of 2000 (CFMA). Put simply, the credit crisis was not primarily due to changes in the markets; it was due to changes in the law. In particular, the crisis was the direct and foreseeable (and in fact foreseen by the author and others) consequence of the CFMA’s sudden and wholesale removal of centuries-old legal constraints on speculative trading in over-the-counter (OTC) derivatives.

Derivative contracts are probabilistic bets on future events. …

Clearing And Trade Execution Requirements For Otc Derivatives Swaps Under The Frank-Dodd Wall Street Reform And Consumer Protection Act, Willa E. Gibson

Akron Law Faculty Publications

This paper examines Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act entitled the “Wall Street Transparency and Accountability Act of 2010” (the “Act”). The Act provides a comprehensive regulatory framework for swap transactions that designates the Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) as the primary regulators of the OTC derivatives swap market. The Act provides a very broad definition of swaps to include most OTC derivatives transactions, and it grants the CFTC regulatory jurisdiction over them with the exception of security-based swaps to which the SEC is granted regulatory jurisdiction. …

The Fsa, Integrated Regulation, And The Curious Case Of Otc Derivatives, Dan Awrey

Cornell Law Faculty Publications

With a view to better understanding the optimal structure of financial regulation, this paper tests prevailing theoretical hypotheses respecting the efficiency and overall desirability of integrated financial regulation relative to competing institutional models. This test is conducted through the lens of a comparative case study examining the approaches adopted by (fragmented) U.S financial regulators and the (integrated) UK Financial Services Authority (FSA) toward the myriad of regulatory challenges posed by the emergence, growth, and systemic importance of over-the-counter (OTC) derivatives markets. More specifically, this paper examines why, despite the numerous theoretical advantages of integrated regulation, the FSA adopted a non-interventionist …

Deregulation Pas De Deux: Dual Regulatory Classes Of Financial Institutions And The Path To Financial Crisis In Sweden And The United States, Erik F. Gerding

Publications

This article presents the following model of two regulatory classes of financial institutions interacting in financial and political markets to spur deregulation and riskier lending and investment, which in turn contributes to the severity of a financial crisis: 1) Regulation creates two categories of financial institutions. The first class faces greater restrictions in lending or investment activities but enjoys regulatory subsidies, such as an explicit or implicit government guarantee, while the second class is more loosely regulated and can make riskier loans or investments and earn additional profits. 2) These additional profits leads to calls for deregulation to enable the …

Regulate Otc Derivatives By Deregulating Them, Lynn A. Stout

Cornell Law Faculty Publications

When credit markets froze up in the fall of 2008, many economists pronounced the crisis inexplicable and unforeseeable. Lawyers who specialize in financial regulation, and especially the small cadre who specialize in derivatives regulation, knew better.That's because the roots of the catastrophe lay not in changes in the markets, but changes in the law. In particular, the credit crisis can be traced to Congress's 2000 passage of the Commodity Futures Modernization Act, which radically altered the traditional legal approach to financial derivatives.

This shift in the legal treatment of financial derivatives has brought the banking system to its knees. The …

Regulate Otc Derivatives By Deregulating Them: Response To Comments, Lynn A. Stout

Cornell Law Faculty Publications

Response to comments by Jean Helwege, Peter Wallison, and Craig Pirrong on the author's article, "Regulate OTC Derivatives By Deregulating Them." Article predates the author's affiliation with Cornell Law School.

How Deregulating Derivatives Led To Disaster, And Why Re-Regulating Them Can Prevent Another, Lynn A. Stout

Cornell Law Faculty Publications

When credit markets froze up in the fall of 2008, many economists pronounced the crisis both inexplicable and unforeseeable. That’s because they were economists, not lawyers.

Lawyers who specialize in financial regulation, and especially the small cadre who specialize in derivatives regulation, understood what went wrong. (Some even predicted it.) That’s because the roots of the catastrophe lay not in changes in the markets, but changes in the law. Perhaps the most important of those changes was the U.S. Congress’s decision to deregulate financial derivatives with the Commodity Futures Modernization Act (CFMA) of 2000.

Prior to 2000, off-exchange derivatives contracts …