Securities Law Commons^™

Regulating Financial Innovation: A More Principles-Based Proposal?, Dan Awrey

Cornell Law Faculty Publications

Modem financial markets are characterized by complexity, seemingly perpetual innovation, chronic asymmetries of information and expertise, and pervasive agency costs. Perhaps nowhere are these characteristics-or their attendant regulatory challenges-more pronounced than within OTC derivatives markets. Mounting effective responses to these challenges must be considered amongst the most difficult and important tasks confronting financial regulators. Prescriptive, rules-based approaches toward financial regulation have thus far proven inadequate to this task. Through the utilization of outcome-oriented principles, enhanced dialogic relationships, intensive supervision, and targeted and proportional (yet vigorous) enforcement, "more principles-based" financial regulation (MPBR) manifests the potential to overcome these challenges and, 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. …

Risk, Speculation, And Otc Derivatives: An Inaugural Essay For Convivium, Lynn A. Stout

Cornell Law Faculty Publications

Speculative trading, including speculative trading in derivatives, is often claimed to provide social benefits by decreasing risk and improving the accuracy of market prices. This assumption overlooks the possibility that speculation can be driven not just by differences in traders' risk aversion and information investments, but also by differences in traders' subjective expectations. Disagreement-based speculation erodes traders' returns, increases traders' risks, and can distort market prices. There is reason to believe that by 2008, the market for OTC derivatives may have been dominated by disagreement-based speculation that contributed to the Fall 2008 credit crisis.