Deregulation and the power of private surveillance in markets
This paper serves as a brief discussion on the current international financial architecture, and the power afforded to private actors in capital markets. When the term 'private surveillance' is used, it denotes the activities of supervisory bodies which are privately owned, unelected and largely unaccountable to state, national or international authorities. This also encompasses the supervision of market participants which use products that are extraneous to current direct international regulatory structures. This paper is grounded in observational research; it uses observations of capitalist market ideology and its relationship with modern finance, together with brief discussions of market actors, to form a critique of the arrangements that have come to dominate regulation of the free market system. It also reflects the author's position as a lawyer, rather than an economist, and focuses on the regulatory challenges that face Western economies. Liberalized financial markets and the attendant increased capital flows between territories have required a deregulatory drive since the collapse of Bretton Woods. This deregulation is an aspect of the political philosophy referred to as neoliberalism, an ideology founded on the principles of minimum state intervention and highly decentralized and liberalized capital markets. This, in turn, has placed great power in the hands of non-state bodies and the market itself in the overarching framework of financial regulation, in preference to the ethos of state surveillance of financial services, products and capital flows which dominated during the post-war era. With this power comes responsibility for the integrity of the financial system, but this paper will highlight the ambiguous role that orthodox liberal philosophy has demanded of these private bodies, and discuss the implications this has for future regulatory structures. It will also critically analyse the danger that placing such power in the hands of private bodies may generate in terms of potential systemic risk. It will briefly address the experience of less financialized economies and their greater resilience to economic contraction. It will conclude by examining ways in which future regulation of capital markets may be served by moving away from the highly deregulated neoliberal paradigm and moving towards the creation of a more interventionist legal axiom. (original abstract)
- Armitstead L. (2009), Hedge Funds Attack EU Regulation Plans, The Daily Telegraph, London, June 17th.
- Bank for International Settlements (2008), The Joint Forum on Risk Transfer: Developments from 2005-2007, Basel Committee on Banking Supervision.
- Bank for International Settlements Monetary and Economic Department (2008), OTC Derivatives Market Activity in the first half of 2008.
- Bliss R.R. (2006), Derivatives and Risk: Buffett, Greenspan and Financial Market Transformation, A Paper presented at the Charlotte Economics Club, 12th May.
- Bolkowska Z., Misiak M. (2009), Main Economic Trends, Polish Market Online, 22nd September.
- Chung J., Rappeport A., Masters B. (2009), 'I Cannot Adequately Express How Deeply Sorry I am for What I Have Done' - Madoff, Financial Times, London, March 13th , p. 1.
- Coffee J.C. (2006), Gatekeepers: The Professions and Corporate Governance, OUP, Oxford.
- Cookson R., Chung J., Mackenzie M. (2008) Credit Derivatives Turmoil Bites, Financial Times, London, March 10th, p. 19.
- Costello M. (2009), Investors Rush to Exit Hedge Funds After Record Losses, The Times, London, January 22nd , p. 43.
- Davies J. (2009), Half of all CDOs of ABS Failed, Financial Times, London, February 10th , p. 12.
- Eichengreen B. (2003), Governing Global Financial Markets, in: M. Kahler, D. Lake (eds.), Governance in a Global Economy, US, Princeton, pp. 168-198.
- Financial Services Authority (2009), The Turner Review: A Regulatory Response to the Global Banking Crisis.
- Friedman M. (2002), Capitalism and Freedom, 40th Anniversary Edn., Chicago, US.
- Grant J. (2009), Exchanges Warn on OTC Clearing, The Financial Times, London, June 4th, p. 37.
- Greenspan A. (2007), The Age of Turbulence: Adventures in a New World, Penguin, UK, London.
- Haldane A.G. (2009), Why Banks Failed the Stress-Test - A Speech Given at the Marcus-Evans Conference on Stress-Testing, February 9-10th.
- Harvey D. (2005), A Brief History of Neoliberalism, OUP, Oxford, UK.
- Ishmael S.M., Chung J. (2009), Stanford Charged with Fraud by SEC, Financial Times, London, February 18th, p. 1.
- Kaufman H. (2009), The Road to Financial Reformation, Wiley, New Jersey, US.
- King M.R., Maier P. (2009), Hedge Funds and Financial Stability: Regulating Prime Brokers will Mitigate Systemic Risks, The Journal of Financial Stability 5, pp. 283-297.
- Levitt K.P. (2008), The Great Financialization, A Speech to the Progressive Economics Forum of Canada, Vancouver, June 2008.
- Luce E. (2008), Keynes Rises above Dissent over Terms and Terminology, Financial Times, London, October 15th, p. 13.
- Managed Fund Association (2000) Sound Practices for Hedge Fund Managers.
- Markopoulos H. (2005), Submission to the SEC: 'The World's Largest Hedge Fund is a Fraud', November 7th.
- Matyjazsek M. (2008), Special Report: The Economic Crisis - Is Poland Immune?, Kraków Post, Kraków, November 2nd.
- McCreevy C. (2009), Opening Speech at the EC Conference on Private Equity and Hedge Funds, Brussels, 26th February.
- McLaughlin D. (2009), £20bn Bailout to Defuse East Europe's Timebomb,The Independent, London, 28th February.
- Mizen P. (2008), The Credit Crunch of 2007-08: A Discussion of the Background, Market Reactions and Policy Responses, Federal Reserve Bank of St Louis Review, September/October, 90(5), pp. 531-567.
- Moody's Investor Service (2003), 2003 Ratings Definitions, Moody's, New York.
- Palley T.I. (2007), Financialization: What It Means and Why it Matters, The Levy Economics Institute and Economics for Democratic and Open Societies Working Paper No. 525, Washington, December.
- Partnoy F. (2006), How and Why Credit Rating Agencies are not Like Other Gatekeepers, University of San Diego Law Research Paper No. 07-46.
- Picciotto S. (1998), Globalisation, Liberalisation, Regulation, Paper delivered at the Conference on Globalisation, The Nation-State, and Violence, 16th April 1998.
- Picciotto S. (2008), Disembedding and Regulation: The Paradox of International Finance, Lancaster University Law School Paper.
- Picciotto S. (2006), Regulatory Networks and Global Governance', WG Hart Legal Workshop - The Retreat of the State: Challenges to Law and Lawyers, Institute of Advanced Legal Studies, 27-29th June.
- Picciotto S., Mayne R. (1999), Regulating International Business: Beyond Liberalization, Macmillan, UK.
- Porter T. (1993), States, Markets and Regimes in Global Finance, UK Macmillan, Basingstoke.
- Rawnsley A. (2008), 'A Golden Age', and Other Things They Wish They'd Never Said, The Observer, London, October 19th.
- Schwarz S.L. (2002), Private Ordering of Public Markets: The Rating Agency Paradox,University of Illinois Law Review, No. 2, February.
- Sri-Pathma V. (2009), CDS Clearing: Behind the Platitudes, Who Will Win and Who Will Lose?, Futures and Options World, April 3rd.
- US Securities and Exchange Commission (1975), Adoption of Amendments to Rule 15c3-1 and Adoption of Alternative Net Capital Requirements for Certain Brokers and Dealers, Release No. 34-11497 (June 26, 1975), 40 FR 29795 (July 16, 1975).
- US Securities & Exchange Commission (2008), Annual Report on Nationally Recognised Statistical Rating Organisations (as Required by Section 6 of the Credit Rating Agency Reform Act 2006).
- US Securities and Exchange Commission (2003), Report on the Role and Function of Credit Rating Agencies in the Operation of Securities Markets.
- US Securities and Exchange Commission (2008), Written Statement of Christopher Cox, Former Chairman of the SEC, 'Statement Regarding MadoffInvestigation', December 16th.
- Vogel S. (1996), Freer Markets, More Rules: Regulatory Reform in the Advanced Industrial Countries, Cornell University Press.
- Walsh K. (2008), Bonfire of the Hedgies, Sunday Times Business Section, London, October 5th, p. 11.
- Weitzman H. (2008), Banks Back CDS Clearing Proposal, Financial Times, London, November 20th, p. 43.
- Wighton D. (2008), Middlemen Who Were LeftHolding the Parcel When the Music Stopped, The Times, London, September 16th, p. 6.