Constructing Financial Markets: Reforming Over-the-Counter Derivatives Markets in the Aftermath of the Financial Crisis

Abstract

The chapter focuses on financial transactions, addressing over-the-counter (OTC) trading of derivatives, which many analyses of the recent financial crisis argue produced significant problems. This area of financial activity grew massively from the 1990s facilitated by legal developments both in the United States and the United Kingdom that ruled out any state regulation of the market while at the same time affirming that the contracts made in the area were fully legally enforceable in US and UK law. At the same time, the private association, the International Swaps and Derivatives Association (ISDA), developed the Model Contract and international private soft law agreements that were generally respected by national legal systems and provided an agreed framework for OTC contracts. The chapter explores how this lack of public regulation was legitimated and the interests which lay behind this legitimation process. It then considers how the financial crisis and the role of OTC derivatives forced a reopening of the issue of how these markets should be regulated. The chapter explores the interplay between what may be described as technical fixes to regulatory problems on the one hand and on the other hand the efforts of private and public actors to defend their interests by shaping the new markets in particular ways.