soft law and the global financial system Rule Making in the 21st Century This book explains how international financial law “works” and presents an alternative theory for understanding its purpose, operation, and limitations Drawing on a close institutional analysis of the post-crisis financial architecture, it argues that international financial law is often bolstered by a range of reputational, market, and institutional mechanisms that make it more coercive than classical theories of international law predict As such, it is a powerful, though at times imperfect, tool of financial diplomacy Expanded and revised, the second edition of Soft Law and the Global Financial System contains updated material as well as an extensive new chapter analyzing how international standards and best practices have been operationalized in the US and EU in the wake of the financial crisis It remains an essential tool for understanding global soft law for political scientists, lawyers, economists, and students of financial statecraft Chris Brummer is a professor of law at Georgetown University and the faculty director of the Institute for International Economic Law He is also the C Boyden Gray Fellow and project director of the Transatlantic Finance Initiative at the Atlantic Council and a senior fellow at the Milken Institute Soft Law and the Global Financial System rule making in the 21st century CHRIS BRUMMER Georgetown University Law Center 32 Avenue of the Americas, New York, NY 10013-2473, USA Cambridge University Press is part of the University of Cambridge It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning, and research at the highest international levels of excellence www.cambridge.org Information on this title: www.cambridge.org/9781107569447 © Chris Brummer 2015 This publication is in copyright Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press First published 2015 Printed in the United States of America A catalog record for this publication is available from the British Library Library of Congress Cataloging in Publication Data Brummer, Chris, 1975- author Soft law and the global financial system : rule making in the 21st century / Chris Brummer – Second edition pages cm Includes bibliographical references and index isbn 978-1-107-12863-7 (Hardback) – isbn 978-1-107-56944-7 (Paperback) International finance–Law and legislation Global Financial Crisis, 2008-2009 Soft law I Title k4444.b78 2015 3430 03–dc23 2015020981 isbn 978-1-107-12863-7 Hardback isbn 978-1-107-56944-7 Paperback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party Internet Web sites referred to in this publication and does not guarantee that any content on such Web sites is, or will remain, accurate or appropriate Contents page vii Preface to the New Edition Acknowledgments ix Key Abbreviations xii Introduction: The Perils of Global Finance 1 Territoriality and Financial Statecraft 23 The Architecture of International Financial Law 62 A Compliance-Based Theory of International Financial Law 119 How Legitimate is International Financial Law? 183 Soft Law and the Global Financial Crisis 218 Implementing the G-20 Agenda: A Transatlantic Case Survey 276 The Future of International Financial Law 326 345 Index v Preface to the New Edition One of the great rewards of writing the first edition of Soft Law and the Global Financial System was the enormous thanks received from people around the world – from Berlin to Bangladesh – grappling with the rapid changes in the infrastructure in international financial regulation following the 2008 crisis My objectives were modest: to provide a short theoretical handbook for those of us in the midst of the change, while also giving an overview as to how the new “system” for financial supervision “works.” Since then it has been referred to by regulators, academics and law firm partners to orient their newcomers to the field, as well as to inform more seasoned practitioners as to key developments in the expanding universe of international financial regulation But the world changes, as does soft law Which is, of course, in part the very purpose of informal, flexible rules But in the seven years since I first embarked upon this project, dramatic changes have inhabited the international financial system and its accompanying regulatory apparatus, indeed even more than I had imagined when the new system was taking shape Just to name a few: The Eurozone crisis that followed the 2008 financial crisis has given birth to a slew of new developments in European financial regulation, including the creation of the EU’s Banking Union; Both the Dodd-Frank Act (and subsequent SEC and CFTC regulations) as well as dozens EU Directives and Regulations have been largely operationalized to implement G20 commitments International standard setters like IOSCO have reorganized the way in which they business in order to accommodate growing interest and influence from emerging markets; The FSB has adopted a more extensive charter outlining its relationship to other international agenda and standard setting bodies; and vii viii Preface to the New Edition Peer review processes have proliferated at the FSB, IOSCO and, notably, the oldest standard setting body, the Basel Committee As these (and many other) changes have taken shape, so has the utility of updating the book to reflect some of the more salient developments Moreover, certain reforms – and especially EU-US efforts to coordinate regulatory efforts – present an opportunity to not only theorize, but to also evaluate, how theory has worked in practice as regulators ignore, implement, comply and even in some instances “overcomply” with international standards This new edition consequently includes, among other things, a new chapter evaluating how international soft law has been operationalized by transatlantic authorities since the crisis, and identifies work still left to be done As such it is both a descriptive and theoretical contribution that, I believe, brings this book full circle Of course, as with the first edition, this second cut does not (and does not try to) speak to every change in international financial regulation since the book was written in 2011 Instead, my approach has been to target the issue areas that best speak to question of soft law’s usage as a coordinating or compliance enhancing device As such, even as the breadth of the work has expanded, its focus has not I hope you enjoy the new edition Chris Brummer Washington, D.C 2015 Acknowledgments The prospect of writing a book on any subject can be daunting for just about anyone, law professors included Indeed, unlike the eighty-page law review articles that dominate our field and are structured along consistent (and at times repetitive) patterns, books place unfamiliar demands on the academic lawyer Not only are we tasked with pushing the boundary of knowledge, as we in our more traditional scholarly journals, but we are also charged with doing so while writing for a broader, generalist audience It thus opens new opportunities to have an impact on, and potentially even help to shape, policy debates, though it also places new demands on those of us more comfortable with shorter and more technical exercises Fortunately, I have benefited enormously from a wide range of support that has made the leap a little less forbidding I owe an enormous debt of gratitude to my former colleagues at Vanderbilt University, where I started my career, who provided the perfect intellectual climate for learning how to execute large-scale projects, affect the course of scholarly debates, and nurture hazy hunches into full-blown academic theories and policy prescriptions Subsequently, my new colleagues at Georgetown have provided invaluable input during the writing process and have both cheered and challenged my thinking and assumptions about markets, regulation and global governance Finally, my research has benefited from my association with the Milken Institute’s ever-expanding community of economic and financial policy thought leaders who have consistently helped me to maintain the energy and sense of purpose required to complete a project of this scope The book builds on earlier scholarship, including articles first published in the California (Berkeley), Chicago, Georgetown, Southern California (USC) and Vanderbilt law reviews, as well as Oxford’s Journal of International Economic Law The second edition also draws heavily on and updates further ix The Future of International Financial Law 341 decision-making processes will generally (and rightly) criticize the shortcomings of the international regulatory system as it exists Thus, in order to maximize the compliance pull of standards, it remains critical that agenda and standard setters enjoy widespread recognition as the most legitimate representatives of the regulatory community This practical objective suggests a rethinking of membership models and participatory structures in key international institutions Meanwhile, for countries vying for leadership, it is important for them, too, to realize regulatory and policy successes that inspire other countries to adopt their approaches For nearly two generations, the United States had an unparalleled reputation for sound regulatory oversight and supervision, and thus its legislation enjoyed unprecedented “output” legitimacy To be sure, it had its failures – the S&L crisis of the 1980s, the Enron & WorldCom frauds, and the hedge fund Long-Term Capital Management case (perhaps the most notable prior to the 2008 crisis) – but the overall strength, growth, and stability of US financial markets largely overshadowed these episodic shortcomings The global financial crisis has largely undermined this reputational capital, however – and not only because the crisis occurred, but also because it was an enormous failure of oversight on many dimensions Both globally and domestically, the United States failed to regulate or to help regulate a slew of important financial institutions and financial instruments, and ceded it ceded its supervisory responsibilities to market participants that were themselves critical of the need for supervision In the wake of the 2008 crisis, the Anglo-American model of financial regulation has been discredited in various respects As Ian Bremmer succinctly notes, “American-style free-market capitalism and the idea of globalization have taken plenty of blame for the meltdown.”17 The crisis started in the United States and was enabled, perhaps above all else, by poor regulatory oversight Meanwhile, countries that adopted US-style regulations and that had “opened themselves to trade and foreign investment took an especially tough hit, while those less dependent on cross-border financial flows weathered the storm with fewer lasting problems.”18 To be sure, other countries and jurisdictions face similar reputational challenges Europe’s own banks were bailed out alongside those in the United States, showing deep lapses in EU oversight regarding their exposure to US mortgage-related securities And although Asia as a whole generally fared well in the crisis, East Asia’s reputation for financial regulation remains in many ways 17 18 Ian Bremmer, The End of the Free Market: Who Wins the War Between States and Corporations? 178 (2010) Id 342 Soft Law and the Global Financial System suspect due to the supervisory failures that made possible the East Asian crisis in the 1990s Similarly, various countries ranging from Mexico south through Central and South America have had their own series of crises that have undermined their reputations for strong regulatory management and supervision With the international system so unsettled and long-standing reputations in disarray, no particular regulatory model holds clear sway in the immediate postcrisis environment The situation is unlikely to change anytime soon; reputations for competence will be built incrementally over time This will particularly be the case over the next decade as national regulators, like market participants, give more careful attention to issues not only of market and credit risk, but also of regulatory risk Reputations for governance and stability will be strengthened or comprised based on the successes and failures of regulatory models at both the national and international levels It is thus important for national regulators to adopt strategies that are advantageous to domestic market participants but that that also achieve the larger goal of overall regulatory effectiveness Regulatory failures at home erode national reputations for policy competence the not-so-questionable future of international financial law When the G-20 was established in 2008 as the world’s premier economic organization, it was viewed in two ways: as a step just short of a global government, or as doomed to ineffectuality because of (among other things) its soft institutional structure and the nonbinding nature of its rules This book has shown that neither view to be correct A stream of international rule making emerged from the international financial system between 2008 and 2011 that bolstered cross-border cooperation and consensus on wide-ranging regulatory matters To be sure, these efforts have not always been successful, and key gaps persist in the international regulatory architecture Moreover, as concern for the state of the global economy grows, bridging the gaps may become even more difficult as slow-growth industrialized countries seek to bolster lending by financial institutions that could be hampered by additional financial regulation But it is disingenuous to assert that significant improvements have not been achieved in the wake of the crisis, even in the absence of formal lawmaking and the emergence of an international financial organization parallel to the WTO Many of these achievements have been hard won and even demonstrated considerable courage by regulatory agencies and national heads of state in resisting the pressure of well-heeled, influential domestic special interests Recent reforms reflect a growing awareness of the interconnectedness of markets and a gradual ideological shift away from the low-level regulatory The Future of International Financial Law 343 intervention in markets that has characterized the last half-century These changes have set in motion regulatory dynamics that will likely have their own self-sustaining qualities Many of the most critical international financial rules have been refined in recent years by a process of ongoing prescriptive rule making – a process that is set in motion once standards have been promulgated Core principles, for example, may have methodologies that add greater precision to their content; reports may be published by international bodies and endorsed by national regulators who, with counterparts, then publish additional interpretations and refinements of existing international legislation; and even surveillance tools like the FSAP reports may be developed to examine the implementation of international standards – in the process, giving greater clarity to their content As theorists of formal international institutions have long acknowledged, international organizations, once established, make cooperation easier And soft institutions are no different from their formal counterparts Like formal international organizations, international financial organizations can help condition participant members to cooperate, establish procedures for assessing problems, build trust, and pool resources for tackling common challenges And all of these qualities can create a basis not only for creating international financial law, but for also elaborating rules and standards already promulgated by the international community Equally important, these same dynamics can generate greater discipline Surveillance may be enhanced as national regulators enjoy greater institutional and member feedback on policy proposals and become more familiar with one another’s regulatory systems through informal peer review As institutions become more important, shaming and exclusion will have greater consequences These qualities of the international regulatory system not, in themselves, determine outcomes or guarantee results Even with the significant utility that international financial organizations provide, governments remain highly sensitive to their national sovereignty and national interests, and can make consensus difficult to reach in agenda- and standard-setting processes Conflicts between national regulators need not, however, be destructive As other scholars have long recognized, where regimes successfully manage conflicts, faith in regimes generally rises Moreover, the patterns of engagement and the substantive principles developed through frequent interactions among national regulatory authorities can, over time, enjoy “procedural weight, both through learning processes and the pragmatic necessity of building on experience.”19 19 Anne-Marie Slaughter, A New World Order 212 (2004) 344 Soft Law and the Global Financial System A common assumption among theorists is that as principles and procedures become more refined, hard law will emerge On the domestic level, this assumption is certainly correct insofar as national authorities work (albeit to varying degrees) to comply with soft law by implementing local regulatory standards and reforms, and then enforcing those laws at home At the international level, however, trust and experience are more likely to incrementally lead to greater innovation in soft law and its supporting institutions One particular practice that may be prove to be especially susceptible to change is the consensus-based nature of many decision rules and, indeed, many organizations – which as we have seen, can generate a range of strategic hold-ups by parties In a world of increasingly interdependent actors, consensus constitutes a potentially major barrier to cross-border coordination The challenge, of course, is what kind of decision rule should replace it Either majority- or even supermajority-based decision making would constitute a type of delegation to international bodies, in the sense that regulators would be required to implement decisions made by standard setters even when in disagreement with those decisions Probably more likely is a subtle and less overt change, through organizational practice, in the very meaning of the term “consensus.” Disagreements among members may simply be elided as chairpersons of working groups or committees find a “general” consensus where supermajorities exist Whatever the ultimate form of consensus, as long as regulators’ trust in the global regulatory system – and in their international homologues – increases, that system will ineluctably continue to evolve and to adapt to changing circumstances, including the maturation of its constituent players into comfortable actors on the global stage In sum, just as awareness of the interconnectivity and interdependence of financial markets and financial market regulation increases, so, too, will the global financial system adapt and continue to evolve And although new institutions and new regulations and regulatory frameworks of various kinds will continue to emerge, many existing trends and strategies will likely continue to dominate cross-border decision making for a good time to come – including the key role of soft law as a coordinating mechanism Against such a backdrop, competitive advantages will come to those regulators that enjoy or develop large and active financial markets and to those that best navigate and leverage the evolving international regulatory architecture Successful financial statecraft will require a robust participation in international standard setting, as well as the smart deployment of transparency, persuasion, and leadership in order to realize national regulatory objectives – and achieve stability in the global financial system Index Abbott, Kenneth, 129, 179–180 accountability, 209–212 challenges global, 193, 196–199 national, 188, 190–193 defined, 184–188 hallmarks, 187–188 objectives, 187 Accountants International Study Group, 83 accounting, 249–250, 255–256, 316–319 fair value, 228, 272 international standards, 227–228 Adelphia, 12 administrative law, 189 Advanced Notices of Proposed Rulemaking, 210 agencies, regulatory, 24 agenda setters and setting, 69–76 agreements credit, 153 dynamics, 134–135 enforcement, 123 informal, 143 information-sharing, 123 memorandums of understanding (MOUs), 123 prescriptive language of soft law, 131 AIG, 16, 82, 221, 231–233, 235, 282 Alien Tort Claims (US), 39 Allan Stanford Ponzi scheme, 13 Alternative Fund Investment Directive (draft, EU), 37 Alvarez, Jose, 63–64 arbitrage, 134, 235–, 238, 238, 255, 257 architecture, financial, 19, 69–71, 75, 98, 101, 108, 120, 143, 162, 199, 208, 260, 339 vertically-integrated, 18 Argentina, 73, 130 “arrangements” (IMF), 154 Assessment of Observance of International Standards and Codes (FSAP), 95 assessments, mandatory financial, 252–253 assets, high-quality liquid (HQLAs), 281 assistance, technical, 53–54 Australia, 31, 53, 58–59, 73, 82, 112, 253 Austria, 253, 294 authority, national, 24–27 Banco Santander, 12–13 Bank for International Settlements (BIS), 75, 92–93, 216 Basel Committee and, 92 CPSS and, 92 dual roles, 92 FSB and, 92 IAIS and, 92 responsibilities, 92–93 Banking Coordination Directive (EU, 1989/ 1993), 55 Bank Recovery and Resolution Directive, 322–323 bankruptcy, 2, 9, 261, 264–265 cross-border, 77, 269, 319–324 banks capital-adequacy, 25, 76, 123, 139, 243, 256, 266–267 capital reserve requirements, 9, 36, 138, 149, 236, 274 commercial, 7–8 investment, 229 multinational, 50, 260 mutual recognition, 54–59 originate-to-distribute model, 236 345 346 Index banks (cont.) structure, 286–289 Barclays Capital, 234 Barnier, Michel, 289, 295 Barosso, Jose Manuel, 295 Basel Committee on Banking Supervision, 63, 77–79, 105–106, 115–116, 121, 151, 157, 193–196, 215–216, 256, 260 Basel I Accord, 79, 197, 200, 203, 210, 221–223, 230, 236–238, 241, 280 Basel II Accord, 79, 203, 210, 223–225, 230, 236–238, 245, 273, 280 capital reforms under, 243–245 Basel III Accord, 79, 97, 203–204, 246–248, 261, 267, 273, 279–286, 323, 331 capital reforms under, 243–245 criticisms of capital reforms, 254–255 EU implementation, 282–286 US implementation, 280–282 “Concordat,” 78 United States and, 199, 287–288 Bears Stearns, 190, 221, 230–231 Belgium, 71, 82, 253 Benbasset and CIE, 13 BIS See Bank for International Settlements (BIS) Brazil, 50, 73, 113, 200, 252, 253 Bretton Woods, 71, 93–96, 171 BRIC countries (Brazil, Russia, India, and China), 18, 48–49, 205 Bundesbank, 28 Cambodia, 294–295 Canada, 40, 55–56, 71, 82, 112, 252–253 capital cross-border dynamics of, 10 rise of, 10–12 defined, 221–222 democratization, 12, 24 ratios, 280 regulating, after Crash of 1929, requirements bank, 21 reserve, 149–150 to risk weighted assets ratio, 79 Tier 1, 204, 222–224, 254–255, 259, 281, 283–284, 334 Tier 2, 222–223, 280 Capital Requirements Directive (CRD) CRD I, 282 CRD IV, 282–283, 298 cartels, global regulatory, 17 CCPs See central clearinghouse counterparties (CCPs) CDOs See collateralized debt obligations (CDOs) CDS See swap, credit default (CDS) Central Bank and Securities Commission (Brazil), 50 central clearinghouse counterparties (CCPs), 304, 306–307, 315–316, 325 CFTC See Commodities Futures Trading Commission (CFTC) Chávez, Hugo, 13 China, 31, 33, 50, 73, 113, 200, 204, 253, 270 Citigroup, 232 “clearing,” 302–303 Code of Conduct for Credit Rating Agencies (IOSCO), 121, 235, 251–252, 261, 290–292, 296 Code of Conduct Fundamentals for Credit Rating Agencies (“Code of Conduct,” Technical Committee, IOSCO), 227 collateralized debt obligations (CDOs), 220 Commerzbank, 15 commitments affirmative, 143–144 defined, 143 implied, 144 violation, 146 Committee on Payments and Markets Infrastructure (CPMI) (formerly known as the Committee on Payment and Settlement Systems or “CPSS”), 86–87, 200, 226–227 Commodities Futures Trading Commission (CFTC), 29, 277, 298, 306, 308 Letter 14–15, 314 Letter 14–16, 314 Compendium of Standards (FSB), 152, 248 compensation, executive, 218, 234–235, 250–251, 263–264 Compensation Principles and Standards Assessment Methodology (Basel Committee), 250 compliance monitoring, 177–179, 241 non-, 119–120 “pull,” 19, 120 Index “substituted” (aka, “mutual recognition”), 57–59 compromise, 61 conditionality, 152–154 connectivity, 68 consensus, 65, 98–100, 135, 344 consent, 207 Considerations for Trade Repositories in OTC Derivatives Markets (CPSS/IOSCO), 247–248 Consolidated Supervised Entities (CSE) program, 230–231 Consultative Group (IASB), 104 contractarian analysis (of soft law), 128–133, 139–140, 142 control, technocratic, 53 convergence, 135 cooperation, 60–61 cross-border resolution and, 233–234 enforcement, 123 “first in time,” 334–335 technocratic peer-to-peer, 63 “two-level,” 67–68 coordination, 100, 207 constraint, overcoming the, 213–216 cross-border, 119–120 essential steps, 133–134 logistics, 110–111 soft law, 139–143 Core Principles for Effective Banking Supervision (Basel Committee), 78, 177, 225–229, 231–233, 241–242 Principle 7, 225–226 Principle 8, 226 Principle 9, 226 Core Principles for Effective Deposit Insurance Systems (IADI), 248 Core Principles for Systemically Important Payment Systems (Core Principles, CPSS), 87, 226, 231–232 Core Principles Methodology (Basel Committee), 78 costs adjustment, 136–137 compliance, 136, 138 sovereignty, 129–131, 269–271 Council of Ministers, 278 Countrywide Financial, 221 courts, role of, in financial regulation, 24, 277–278 covenants, negative, 143 347 CPSS See Committee on Payment and Settlement Systems (CPSS) CRD See Capital Requirements Directive (CRD) Credit Rating Agencies Regulation (EU) CRA 1, 292 CRA 2, 292 credit-reporting agencies (CRAs), 218, 227, 235, 251–252, 261–262, 290–297 regulating, 38 Credit Suisse, 267 crises, financial Asia, 13, 63, 94, 152, 340, 342 global 2010, 324 frequency of, Indonesia, 15 Malaysia, 14–15 Mexico, 1, 13–14, 16 South Korea, 14 Thailand, 1, 14–15 United States, 340–341 1929, 2008, 1, 15, 44, 54, 63, 218–225, 241, 324, 326 Cross-border Crisis Management Group (FSB), 260 CSE See Consolidated Supervised Entities (CSE) program Cunningham, Lawrence, 104 Czechoslavia, 160 DCOs See derivatives clearing organizations (DCOs) decision making, 100 internal, 31–32 rules, 98–100 technocratic, 186 decoupling, transactional, 45–51 defection, 140–141, 179 delegation, 24–25, 27–30, 190 administrative, 24–27 “dynamic,” 329–330 mandates, 28–29 scope, 28–29 Democratic Republic of Georgia, 209 dependency, path, 108–110 deregulation, 10 derivatives, 11, 231, 246–253, 297–316 business conduct, 310–312 central clearing, 302–304 clearinghouse regulation, 304–307 348 Index derivatives (cont.) contingent forwards, 299 non-deliverable forwards, 314 OTC, 301 “standardized,” 257 trading, 307–310 registration, 257–259 standardized, 302–304 derivatives clearing organizations (DCOs), 304, 306–307, 316 Des Brisay v Goldfield Corp., 40 design choices (primary institutional), 100–107 option sets, 18 regulatory, 27–34 Deutsche Bank, 15 Deutsche Börse, 268 Dexia, 221 discipline institutional, 151–161 market, 148–151 name and shame, 154–156 disclosure, 148–149 standards, 37–38 Dodd-Frank Act, 259, 281, 287, 292–293, 297–302, 305–312, 319–321 Title I, 319 Title II, 319, 321 Title VII, 298–300, 302–303, 304, 307–308, 314 domination, agency, 66–67 Drezner, Dan, 136, 156 Due Process Oversight Committee (IASB), 205 EBA See European Banking Authority (EBA) ECB See European Central Bank (ECB) economy, political, 41–45 Effective Resolution of Systemically Important Financial Institutions (FSB), 260 efficiency, 25 “efficient frontiers,” 330 Emerging Markets Committee (IOSCO), 105 EMIR See European Market Infrastructure Regulation (EMIR) enforcement, globalization and, 52 Enron, 12, 86, 341 equity, common, 280 ESF See European Stability Facility (ESF) ESMA See European Securities and Markets Authority (ESMA) e-Standards Forum, 175 Ethiopis Tafara, 12 EU See European Union (EU) European Banking Authority (EBA), 278 European Central Bank (ECB), 279–280 European Commission, 40, 112, 210, 278 European Market Infrastructure Regulation (EMIR), 297–302, 308–310, 312, 315–316 European Parliament, 278–279, 297 European Securities and Markets Authority (ESMA), 278 European Securities and Markets Authority (ESMA), 295, 305–306, 316 European Stability Facility (ESF), 294 European Union (EU), 73, 112, 210, 270 expertise, 25, 207 Fannie Mae, 221 FASB See Financial Accounting Standards Board (FASB) FATF See Financial Action Task Force (FATF) FBOs See Foreign Banking Organizations (FBOs) FDIC See Federal Deposit Insurance Corporation (FDIC) Federal Deposit Insurance Corporation (FDIC), 280, 320–321, 323, 337 Federal Reserve, 219, 277, 279–280, 337 Federal Reserve System (FRS), 280 Fiji Islands, 208 Financial Accounting Standards Board (FASB), 255, 270, 316–318 Financial Action Task Force (FATF), 87–89, 154–157, 159–160, 173–174, 178, 339 responsibilities, 88 Financial Conduct Authority, 301 Financial Conglomerate Directive (EU), 37 Financial Industry Regulatory Authority, 29 Financial Sector Assessment Program (IMF), 152, 241, 338 Financial Services Action Plan (2000), 47 Financial Services Authority (FSA, UK), 27, 29 Financial Services Modernization Act (US), 37 Financial Stability Assessment Program (FSAP), 338–339, 343 Financial Stability Board (FSB), 69–70, 74–76, 106–107, 113, 115, 159, 163, 166, 173, 194, 199, 199–200, 205–208, 214, 216, 245, 253–254, 328, 331, 338–339 organizational features, 75–76 responsibilities, 74–75 rulemaking authority, 76 Index Financial Stability Forum (FSF), 117, 163, 331 responsibilities, 94 Financial Stability Oversight Council (FSOC), 319 Fitch, 293, 318–319 “Footnote 88,” 314 forbearance, regulatory, 192, 228, 328 Foreign Banking Organization (FBO), 324–325 Foreign Banking Organizations (FBOs), 281, 284–286 Foreign Sector Assessment Program (FSAP), 177–178, 241, 253, 262, 270 responsibilities, 94–95 weaknesses, 162–171 Form 20-F (SEC), 211–212 Fortis, 221, 233–234 Forty Recommendations (FATF), 88, 155, 160 fragmentation, 67, 116 France, 30, 71, 82, 109, 253, 264, 267, 271, 294 Franck, Thomas, 183–184 fraud, 12, 34, 39–41, 67, 79–80, 111 FRS See Federal Reserve System (FRS) FSAP See Foreign Sector Assessment Program (FSAP) FSB See Financial Stability Board (FSB) FSF See Financial Stability Forum (FSF) FSOC See Financial Stability Oversight Council (FSOC) G + 1, 112 G-7 (Group of Seven), 71, 73, 77, 88, 94, 113, 199–200, 205, 207–208, 221, 242, 269 G-8 (Group of Eight), 71, 183, 199, 208, 214 G-10 (Group of Ten), 71, 78, 195 G-20 (Group of Twenty), 69–70, 72–74, 106, 113, 115–117, 183, 199–200, 205, 207–208, 214–215, 249, 253, 256, 331, 342 Basel Committee and, 116 consensus, 73 Finance Ministers and Central Bank Governors (G-20), 72–74 agenda, 20 Leadership Summits, 73–74, 199–200, 245–246 London, 63 Pittsburgh, 264 Washington, 242 purpose, 71 GAAP See Generally Accepted Accounting Principles(GAAP) 349 GATT See General Agreement on Tariffs and Trade (GATT) General Agreement on Tariffs and Trade (GATT), 124 General Arrangements to Borrow, 71 General Electrics, 40 Generally Accepted Accounting Principles (GAAP), 44–45, 83, 228, 249, 270, 317–319 Germany, 16, 30, 43, 71, 82, 109, 241, 252–253, 268, 271, 294 G-group development, 71–72 Glass-Steagall Act, 287 globalization financial risk and, 12–16 repercussions of, 52 globally systematically important banks (G-SIBs), 256, 280 globally systematically important financial institutions (G-SIFIs), 256 Gold, Joseph, 154 Goldman Sachs, 230 Gordon, Jeff, 322 Gramm-Leach-Bliley Act, 230, 265 Greece, 43, 286, 293–294 G-SIBs See globally systematically important banks (G-SIBs) G-SIFIs See globally systematically important financial institutions (G-SIFIs) guidance, prescriptive, 70 Guidance on the Application of the 2004 Derivatives CCPs (CPSS/ IOSCO), 247 Guzman, Andrew, 125, 127, 181 Handbook for Countries and Assessors (FATF), 174 Hard and Soft Law in International Governance (Abbott and Snidal),, 179–180 hard law See also international law; legalization; soft law compliance under, 124–128 restrictive constraints, 129–130 soft law and, 141, 143, 179–182 hedge funds, 229–230 Herstatt Bank, 77–78 heterogeneity, expanding institutional, 108–115 Honeywell, 40 Hong Kong SAR, 253, 268 housing bubble, 15, 219, 221, 291 350 Index IADI See International Association of Deposit Insurers (IADI) IAIS See International Association of Insurance Supervisors (IAIS) IASB See International Accounting Standards Board (IASB) IASC See International Accounting Standards Committee (IASC) IFAC See International Federation of Accountants (IFAC) IFRS See International Financial Reporting Standards (IFRS) IHC See intermediate holding company (IHC) IKB Deutsche Industriebank, 15, 291 IMF See International Monetary Fund (IMF) impairment model of loss recognition, 240 Implementing OTC Derivatives Market Reforms (FSB), 247 independence political, 30–31 structural, 30–31 India, 73, 113, 200, 204, 253, 270 Indonesia, 73 information digitalization, 10–11 sharing, 123 technology, 10–11 innovation, financial, 10 Institute for Securities Market Development (SEC), 53 Institute of International Finance, 103 institutions, informal, 65–66 insularity, political, 25–26 Intensity and Effectiveness of SIFI Supervision (FSB), 245 Inter-American Association of Securities Commissions, 80 interest conflicts of, 235 national, 266–269 rates, 21, 218 adjustable rate mortgages, 219 intermediate holding company (IHC), 281–282 Internal Ratings-Based Approach (IRB), 224, 236–237, 238 International Accounting Standards (IAS), 83 IAS 39, 249–250, 255 International Accounting Standards Board (IASB), 82–85, 103–105, 112–117, 200–201, 204–205, 210, 239, 255, 270–272, 316–319 G-20 (Group of Twenty) and, 84 hard law and, 83 IASB 9, 318 International Bar Association and, 104 International Chamber of Commerce and, 104 IOSCO and, 104–105 World Bank and, 104 International Accounting Standards Committee (IASC), 83 International Association of Deposit Insurers (IADI), 90–91 International Association of Insurance Supervisors (IAIS), 106, 204, 214, 216, 245 International Association of Insurance Supervisors (IAISI), 81–82, 121, 197, 233 International Auditing and Assurance Standards Board (IFAC), 85 International Banking Federation, 103 International Co-operation Review Group (FATF), 96 International Disclosure Standards for Crossborder Offerings and Initial Listings by Foreign Issuers (IOSCO), 80 International Federation of Accountants (IFAC), 85–86, 103–104, 116 international financial law See also hard law; soft law accountability and, 327 coercion and, 19, 126–128 commitments under, 143–144 as a dependent variable, future, 342–343 key attributes, legal formality, 327–329 legitimacy and, 327 limits, 271–275 obligation and, 327 International Financial Reporting Standards (IFRS), 44, 84, 204, 228, 249, 270, 302, 317, 319, 337 IFRS 9, 249, 255–256, 271–272 International Monetary Fund (IMF), 21, 70–71, 74, 93–95, 115, 152–154, 157, 159–160, 163–164, 166, 177–178, 201, 213–214, 270–271, 328, 338 Article IV, 96 Thailand and, 15 International Organization of Securities Commissions (IOSCO), 79–81, 83, 96–97, 105–106, 109, 121, 174, 178, 193–194, 197, 200, 204–205, 211–212, 214–215, 226–227, 229, 256–257, 339 Index “IOSCO Board,” 102 International Regulators’ Seminar (Financial Services Authority), 53 International Standards on Auditing (ISA), 85 International Swaps and Derivatives Association (ISDA), 91–92, 116 responsibilities, 91 IOSCO See International Organization of Securities Commissions (IOSCO) IRB See Internal Ratings-Based Approach (IRB) Ireland, 253, 293–294 ISDA See International Swaps and Derivatives Association (ISDA) Italy, 71, 82, 204, 253, 271 Japan, 16, 33, 71, 82, 112, 157, 204, 222, 252, 253 Joint Forum on Financial Conglomerates, 82, 106 jurisdiction, 35–36, 39 Justice, US Department of, 40 Kant, Immanuel, 183–184 Keohane, Robert, 197 Key Attributes of Effective Resolution Regimes for Financial Institutions (FSB), 248–249, 324 Lamfalussy Process, 47–48 Landesbanken, 221, 267 leadership Basel Committee, 101 centralized versus decentralized, 101–102 IOSCO, 102 “legality,” 180, 327 attributes of, legalization, 141, 179 “legislation + delegation,” 278 legislatures, private, 102–106 legitimacy, 6, 114–115, 183, 340–342 defined, 114–115, 184–186 global regulatory challenge, 193–196 trend toward greater, 199–202 input, 185–186, 207 international, 193–196 national, 188–190, 193 output, 185–186, 341 “expert,” 190 overlooked sources, 205–209 values, 207 Lehman Brothers, 16, 221, 230–231, 234, 243, 322 351 lending “originate to distribute,” 219, 236 sovereign, 237–238 Letter of Development Policy (to World Bank), 153 Letter of Intent (to IMF), 153 Levin, Carl, 318 lex financiaria, 46 liberalization, 54–55 Liikanen, Erkki, 288–289 linkage, organizational, 200 Lipton, Charles, 129 liquidation, 265 loan origination process, 153 Long-Term Capital Management, 341 Luxembourg, 16, 253 MAD See Market Abuse Directive (MAD) Madoff, Bernie (scandal), 2, 12 market discipline, 148–151 global IPO, 50–51 growth rate, 46 implications for globalized, 13 prices, 240 size, 45 state power and, 142 unique investment, 46 Market Abuse Directive (MAD), 298 Market in Financial Instruments Directive (MiFID), 298 MiFID II, 301 Market in Financial Instruments Regulation (MiFIR), 298 Master Agreement (ISDA), 91 McCreevy, Charles 261 McKinsey & Company, 267 membership, 100 Basel Committee, 109 exclusive versus universal, 100–101 FATF, 88 Federal Reserve, 32 FSB, 109 G-20, 101 IADI, 91 IAIS, 81, 101 IASB, 84 IOSCO, 101–102, 109 OECD, 89–90 sanctions, 158–161 SEC, 32 sectoral versus cross-functional, 106–107 352 Index Merrill Lynch, 221, 230 Metalclad Corp v United Mexican States, 130 Mexico, 73, 130, 253, 342 MiFID See Market in Financial Instruments Directive (MiFID) MiFIR See Market in Financial Instruments Regulation (MiFIR) Ministerial Conference (WTO), 213 mobility cross-border, 52 national regulation and, 62 monetary law, implications of, for financial regulation, 21 money laundering, 87–88, 154–157 money market funds, 229 monitoring, 19, 70–71, 161–162, 262–263 assessment program, 162–171 beyond FSAP, 171–177 data interpretation and, 166–171 delegated, under Bretton Woods, 93–96 IMF/World Bank, 240–242 informal peer review, 171–175 information sharing, 165–166 non-delegated, 96–98 nongovernmental, 175–177 questionable data input, 164–165 regulatory surveillance and, 252–253 suboptimal participation and, 163–164 Monitoring Board (IASB), 104–105 staffing, 114 “monitors,” international, 93–98 monopoly, regulatory, 36 Moody, 224, 293 Morgan Stanley, 230 Multijurisdictional Disclosure System (MJDS), 55–57 Multilateral Memorandum of Understanding (MMOU, IOSCO)., 80, 82, 96, 174 multilateral trading facilities (MTFs), 312, 314–315 multipolarity, 60–61 Myanmar, 157 Nationally Recognized Statistical Rating Organizations (NRSROs), 290, 292–293 Netherlands, 31, 71, 82, 253 network theory, 67–69, 117, 132–133, 142 New World Order (Slaughter), 67 Non-cooperative Countries and Territories (NCCTs), 156 non-financial entries (NFEs), 302 non-financial firms (NFFs), 304 North American Free Trade Agreement (NAFTA), 130 Northern Rock, 221, 291 notice and comment procedures, 202–204, 211 NRSROs See Nationally Recognized Statistical Rating Organizations (NRSROs) Nye, Joseph, 197 Nzelibe, Jide, 127 Obama, Barack, 292 Objectives and Principles of Securities Organization (IOSCO), 80 Objectives and Principles of Securities Regulation (IOSCO), 226, 246, 251 obligation, legal, 143, 179 OECD See Organisation for Economic Co-operation and Development (OECD) options, 299 Organisation for Economic Co-operation and Development (OECD), 50, 88–90, 160, 222–223, 237 FATF and, 89 hard law and, 89 responsibilities, 89 voting procedures, 90 organizations, financial regulatory agency domination, 66–67 charters, 64 core attributes, 64 defined, 62 democracy and, 183–184 design choices, 100–107 effective, 119 formal, 66 fragmentation, 67 informal, 65–66 national authority and, 100 roles, 65 traditional, 63–65 tripartite, 64–65 voting procedures, 65 Oxford Analytica, 175 Pakistan, 294–295 Parmalat, 12 passport effect, 55 “Path Forward” (CFTC/EC), 313–314, 325 Index payment systems, 231–232, 247–248 Basel, 226–227 persuasion, regulatory, 145, 335–337 special-treatment strategies and, 53–59 Peterson, Robert, 12 philosophy, regulatory, 262–265 Porter, Tony, 216 Portugal, 293–294 power, 111–114 “of production” (Hume), 327 regulatory, 51–52 soft, 128, 132–133 Principles for Enhancing Corporate Governance (Basel Committee), 251 Principles for Sound Compensation Practices (FSB), 76 Principles for Sound Compensation Practices (FSF), 250 Principles of Corporate Governance (IADI/ Basel Committee), 90 Principles of Corporate Governance (OECD), 89 Principles on Capital Adequacy and Solvency (IAIS), 81–82 private sector contracts, 26–27 participation in regulation, 32–34 procedure, informal and formal, 202–205 procyclicality, 238–240 proprietary trading, 286–289 Prospectus Directive (EU), 54–55 proxies, geographic, 36 Public Company Accounting Oversight Board, 86 Public Interest Oversight Board (IFAC), 86, 105 ratios capital, 280 leverage, 281 leveraging, 284 liquidity, 243 Liquidity Coverage Ratio, 244–245 Net Stable Funding, 245 “q,” 149 reciprocity, international law and, 126–127 Recommendations for Central Counterparties (CPSS/IOSCO), 86 “Red Book” on payment systems (CPSS), 87 reform capital, 243–245 post-crisis, obstacles to, 263–271 353 regulation, financial, 120–123 bank, 7–8 best practices, 120–122 consequences of lax, 1–2, 9–10 “cooperative federalism” (EU), 29 core principles, 121 costs, 30 defined, 6–10, 34 divergent philosophies, 134–135 economic prudence and, features, 65–67 focus points, 8–9 forms, 34 impracticality of global, 329–333 insurance, national, 331–333 official international agreements and, 64 “principle-based,” 28 reform, securities, “twin peak” (Australia), 29 regulatory system 2008–2011, 242–246 gaps, 228–235 international, qualitative features of, 65–67 transatlantic, overview, 277–279 Rehnquist, William, 42 reinsurance companies, 50, 81 Report and Recommendations of the Crossborder Bank Resolution Group (Basel Committee), 248 reporting negative, 165–166 regulatory, 122–123 self-, 164–165 uses, 122–123 Report of the Financial Stability Forum on Addressing Procyclicality in the Financial System (FSB), 76 Report on Enhancing Market and Institutional Resilience (FSB), 76 Report on OTC Derivatives Data Reporting and Aggregation Requirements (IOSCO/CPSS), 259 Reports on Observance of Standards and Codes (ROSC), 162, 170–171, 175, 241 representation, 207 reputation, 120, 143, 340 international law and, 125–126 regulatory, 49–50, 145–148 354 Index resolution authority, 260–261 and crisis management, 248–249 EU banking union, 322–324 resources, 30 responsiveness, 207 retaliation, 143, 151–152 retaliation, international law and, 127–128 retribution, 143 review, 187–188 asset quality, 286 peer, 159, 339 formal, 173–175 informal, 171–173 “thematic,” 253 “Rhinebridge,” 15 “ring fencing,” 288, 306 Risk, Value-at (VaR), 238–239 Rodrik, Dani, 135 rulemaking authority, 25, 328–330 Russia, 33, 71, 253 sanctions, 120 capital market, 156–158 expulsion, 160–161 hard law, 132 retaliatory, 127–128 Sarbanes-Oxley Act (US), 38, 44, 55–56, 86, 136 Sarkozy, Nicholas, 264, 268 Schapiro, Mary, 318 Schooner, Heidi, 223, 236 SDRs See swap, data repositories (SDRs) securities mortgage-backed (MBSs), 238 regulation of, UK versus US, 28–29 Securities and Exchange Commission (SEC, US), 27–29, 31, 44–45, 55–58, 107, 114, 211–212, 230, 270, 277, 290, 298, 337 securitization, 11, 219–220, 236–237 SEFs See swap, Execution Facilities (SEFs) self-regulatory organizations (SROs), 27, 29, 32 Self-Regulatory Organizations Consultative Committee (IOSCO), 80 shadow banking, 16, 229–231, 245–246, 256–257 shaming, 120 shirking, legislative, 26 short-selling (defined), 34 “silent participations,” 267 Singapore, 253, 268 Singer, David, 16, 157, 334 Single Resolution Mechanism (ECB, European Commission, European Council, national authorities), 322 Single Supervisory Mechanism (ECB), 322 Slaughter, Anne Marie, 67 Snidal, Duncan, 129, 179–180 soft law, 3, 116, 333–342 See also hard law; international law adjustment costs, 136–137 best practices, 121–122 centrality of, in international financial regulation, 120–123 coercion and, 132, 179, 183 as a communicative mechanism, 132 competitive market pressures, 137–139 dichotomy with hard law, 179–182 dominance of, in international financial law, 128–139 expectations, 151 global financial system and, 16–22 hard law and, 141, 143 instruments, 120–124 leading by example, 340 “nonbinding,” trust and, 133–134 South Africa, 73 South Korea, 73, 253 sovereignty, 42 Spain, 82, 253 Special Recommendations (FATF), 88 SROs See self-regulatory organizations (SROs) standard, 70, 188 common, 133–134 setters, 117, 197–198 sectoral, 76–82 specialist, 82–92 Standard and Poor (S&P), 224, 293 Standing Committee on Credit Rating Agencies (IOSCO), 252 Statement of Principles on Money Laundering (Basel Committee), 87 stress testing, 243, 261, 263, 282 subprime borrowers, 218–219 Sullivan and Cromwell, 212 supervision, 225–226 “dual key,” 78 “pillars,” 224–225 Supervisory Guidance of the Basel Committee (Basel Committee), 233 Index swap credit default (CDS), 11–12, 16, 46, 218, 231, 235, 299 “naked,” 258 data repositories (SDRs), 307–308 dealers (DS), 300, 308–309, 311 Execution Facilities (SEFs), 303–304, 312, 324–325 hedging, 302 major participants (MSPs), 300, 308–309, 311 security-based, 299 standardization, 302 synthetic, 220 Sweden, 71, 82, 253 Switzerland, 71, 82, 252–253, 267 systematically important financial institutions (SIFIs), 29, 320 Tarullo, Dan, 98, 150, 172, 281–282, 337 Taylor, Michael, 223, 236 technical assistance, 53–54 Technical Committee (IOSCO), 102, 105, 113, 115, 200, 208, 227, 246, 251–252 technology, 17 territoriality, 61 defined, 23, 35, 39 extra“direct” legislation, 39–41 forms of, 39–40 inherent limitation, 41 leveraging, 37 as a regulatory technique, 34–39 repercussions, 52 “too big to fail,” 232–233, 259–260, 287–288 trading facilities multilateral (MTFs), 303 organized (OTFs), 303 transparency, 197–198, 203, 247, 271, 314, 338–339 defined, 187 leveraging, 337–340 Treasury, US Department of the, 31, 301 treaties, 129, 131–132, 143–144, 180–181 355 hard law and, 124 investment, 130 parties to, 64 Treaty of Maastricht (1992), 47 Turkey, 73, 155, 253 Ukraine, 157 unilateralism, 18, 41–43, 60–62, 133, 243, 261, 324–325, 332–334, 340 United Kingdom, 16, 33, 53, 71, 82, 109, 157, 222, 253, 267–269, 271 United Nations, 112 United States, 10, 14, 30, 32–33, 46–47, 50–51, 53, 55–58, 71, 82, 109, 112, 157, 201, 204, 222, 252–253, 267–269, 270, 271, 295, 341 USB, 15, 267 Vienna Convention Against Illicit Traffic in Narcotic Drugs (UN), 87–88 Vienna Convention on the Law of Treaties, 196 Vivendi, 12 Volcker Rule, 259–260, 266, 287–289, 324–325 Wachovia, 221 Washington Mutual, 221 Wharton Financial Institutions Center, 175 World Bank, 21, 70–71, 74, 93–95, 115, 152–154, 159–160, 163–164, 173, 177, 201, 213–214, 338 WorldCom, 12, 341 World Congress of Accountants, 85 “World Financial Organization,” 20, 326–329, 342 impracticality of, 329–331 World Trade Organization (WTO), 124, 127–128, 130 WTO, 291 Zaring, David, 197 Zimbabwe, 160 ... 27 6 The Future of International Financial Law 326 345 Index v Preface to the New Edition One of the great rewards of writing the first edition of Soft Law and the Global Financial System was the. . .soft law and the global financial system Rule Making in the 21 st Century This book explains how international financial law “works” and presents an alternative theory for understanding its... Financial Law 62 A Compliance-Based Theory of International Financial Law 119 How Legitimate is International Financial Law? 183 Soft Law and the Global Financial Crisis 21 8 Implementing the G -20 Agenda: