Contracts as regulation model : applications and legal implications in over-the-counter financial markets

Abstract

Defence date: 15 June 2016 ; Examining Board: Professor Fabrizio Cafaggi, EUI; Professor Hans-W. Micklitz, EUI; Professor Katharina Pistor, Columbia Law School; Associate Professor Paola Iamiceli, University of Trento. ; We develop a conceptual model of contracts as regulatory instruments in over-the-counter (OTC) financial markets. The model is informed by the functional understanding of financial regulation as addressing problems of counterparty risk, liquidity, information and systemic risk and structural understanding of regulation as a process of standard-setting, monitoring and enforcement. The justification of conceptualization contracts as regulatory instruments is found in the nature of the political economy considerations that inform the definition of certain contracts used in OTC financial markets. While many scholars rely on conceptualization of the said contracts as boilerplate, we argue that there exist important qualitative differences between boilerplate and regulatory contracts, which we link to a broader spectrum of interests taken into account in their definition in the process of standard-setting. The model and its application to loan and derivatives markets help to highlight the impact of governance features of the organization developing the contract and the regulatory competition to which the organization is exposed on the scope of the regulatory function. We also use a number of indicators and attributions to examine the effectiveness of regulatory contracts. While the contractual model displays some weaknesses in terms of both standard-setting (conflicts of interest) and enforcement (reliance on delegation) compared to its better established counterpart – the organizational model associated with exchanges – the contractual model helps to account for important self-regulatory features of OTC financial markets and offers suggestions as to how the structure of OTC financial markets can be improved.