2009 Special Issue
Capital Markets Law Journal Special Issue 1: The International Financial Crisis
Sponsored by the International Capital Market Association
Part 1:
Article: The Roots of the Financial Crisis
Professor Stephen Wallenstein, Global Capital Markets Center, Duke University
Key points:
In Professor Wallenstein’s article on the background to the crisis, it is argued that the the crisis was caused by wilful indifference to risk management. The indifference manifested itself in policy and implementation at all levels of finance from mortgage brokers to boardrooms, and it spilled over into the agencies responsible for ratings and regulations.
This indifference was compounded by Greenspan's policies at the Federal Reserve. Low interest rates and high levels of liquidity encouraged more lending, less attention to oversight, and a relaxation of rules at every juncture.
Easy credit led to high-yield financial products, which created a continually increasing demand for more such products and even higher yields. At the same time these new products were highly rated by the CRAs, and therefore perceived to be safe.
Brokers, bankers and regulators ignored basic risk management practices in the securitization process. The financial community worldwide denied the possibility of a real estate bubble, and based its loans, bonds and ratings on a continuing rapid rise in real estate. FAS 157 and mark-to-market accounting compounded the problem.
A further spur to liquidity was global imbalances, such as large trade surpluses in China, Singapore and other emerging economies. This created demand from sovereign wealth funds.
Compensation policies were tied to each individual trader’s profit-and-loss, which prodded traders to move more financial products with no thought to long-term consequences.
Biography, Professor Stephen Wallenstein:
Professor Stephen Wallenstein is Director, Duke Directors’ Education Institute and Professor of the Practice of Law, Business and Finance. He is a recognized expert in corporate governance and best practices for publicly traded companies in the US and abroad. He joined the Fuqua and Duke Law Faculties in 1998 and founded the Duke Directors' Education Institute (DEI) in 2002. He established the Duke Global Capital Markets Center (GCMC) in 1998. Mr. Wallenstein is an expert on emerging markets, having spent fifteen years as Senior Counsel and Senior Investment Officer at the International Finance Corporation in Washington D.C. He is teaching a course this Spring on the Global Financial Crisis at Fundacao Getulio Vargas in Rio. Professor Wallenstein's teaching career at Duke includes interdisciplinary courses on corporate governance, venture capital and private equity, and international finance at the Law School and Fuqua, in addition to a course on global capital markets for Duke Undergraduates.
Part 2:
Article: Looking past consensus to implementation: A growing international consensus on capital markets regulatory reform masks tough questions about implementing such reforms
Edward F. Greene, Cleary Gottlieb Steen & Hamilton LLP
Key points:
This article considers the recent series of reports that have been issued assessing the causes of the crisis and proposing regulatory reforms. The article gives an overview of the consensus that has emerged from the recommendations made by these reports and discusses some of the issues yet to be resolved.
Biography, Edward F. Greene:
Edward F. Greene is a partner based in the New York office of Cleary Gottlieb Steen & Hamilton. Mr. Greene’s practice focuses on securities, corporate governance, regulatory and financial services reform and other corporate law matters. Mr. Greene served as General Counsel of the Securities and Exchange Commission from 1981 to 1982 and Director of the Division of Corporation Finance from 1979 to 1981. From 2004 to 2008, Mr. Greene served as General Counsel of Citigroup’s Institutional Clients Group. He oversaw all legal aspects related to the group’s activities with issuers and investors worldwide, including investment banking, corporate lending, derivatives, sales and trading, and transaction services. He served as Chairman of the Institutional Clients Group Business Practices Committee in connection with his responsibility for regulatory and transactional matters. Mr. Greene is currently teaching a seminar at Columbia Law School and has been a Lecturer at the Harvard Law School, and an Adjunct Professor of Law at the University of Pennsylvania and Georgetown University Law Center.
Article: On keeping donkeys in stables
Lachlan Burn, Linklaters LLP
Key Points:
The recent credit crisis has inevitably led to the call for more regulation. But, before adding to the regulatory load on the shoulders of the market, it is sensible to look at whether what is there already might suffice, if it could be made to work better. The question is whether better implementation is required - better governance and control - rather than more rules. This article looks at this question in the context of risk identification and management.
Biography, Lachlan Burn:
Lachlan Burn is a partner at Linklaters LLP with over 33 years’ experience in banking and capital markets issues. His expertise includes debt securities, GDRs, convertible bonds, derivatives of all types and repackagings. He is a member of the London Stock Exchange’s Primary Markets Group and a member of the Listing Authority Advisory Committee. He is also a member of the Legal and Documentation Committee of the International Primary Market Association. Between 2002 and 2006, he was a member of the Financial Markets Law Committee. Between 1992 and 1994 he was a member of the Legal Risk Review Committee.
Article: Navigating the Financial Crisis: Choosing the Right Path for the Derivatives Industry
Robert G. Pickel, ISDA
Biography, Robert G. Pickel:
Robert G. Pickel is Chief Executive Officer of the International Swaps and Derivatives Association, Inc. Mr Pickel has been involved in the OTC derivatives for over two decades, acting as outside counsel to ISDA and as General Counsel of ISDA prior to becoming Chief Executive Officer in 2001. He has lectured extensively on derivatives and has testified and represented the industry before regulators and legislators around the world
Article: The regulatory drive towards central counterparty clearing of OTC credit derivatives and the necessary limits on this
Adam Glass, Linklaters LLP
Key points:
This article looks at the standardization of derivatives contracts at the insistence of the regulators and the limits to this. Regulators are pushing toward standardization of OTC derivatives to reduce systemic risk to the banking system from these instruments. The article looks at the aims of this drive and the proposed means of achieving these goals. It argues that the drive towards standardization has three components:
1) Regularization of back office procedures, to avoid ‘back office’ risk; 2) The adoption of preparatory changes necessary to allow the clearing of credit derivatives through central clearing counterparties; 3) The adoption of actual CCP clearing of CDS.
This article also gives a detailed analysis of the potential limits to the standardization initiative considering issues such as: the complexity of some OTC derivatives; limited access to pricing models; national and supranational rivalries; swap dealer opposition to the expansion of clearing; concentration risks of CCPs; and CCP single-product clearing vs. CCP multi-product clearing. Consideration is given to the issue of how reporting of prices, counterparties, reference entities or indexes covered by the non CCP clearable portion of the OTC CDS market or the OTC derivatives market will be handled. The article also takes an important look at the role of US regulators in the future for OTC derivatives.
Biography, Adam Glass:
Adam Glass is named as a leading lawyer in Chambers USA 2008. His practice includes credit and equity derivatives and structured notes of all kinds, including regulatory capital structured note repackagings under Basel II. He works with the firm’s litigators and bankruptcy lawyers in advising on disputes involving swap agreements with insolvent counterparties. He has advised foreign bank credit default swap counterparties in negotiations with insolvent monoline insurers and has represented Lehman Brothers International (Europe) in the settlement of terminated swap agreements. He advises on the interpretation of the credit derivatives definitions, including credit event disputes and successor and succession event analysis, and is a frequent commentator on new developments in structured finance and derivatives, including the proposed regulation of credit derivatives as insurance by the New York Insurance Department. He is an experienced securities lawyer who has written on numerous US securities law topics.
Article: Macroeconomic Regulation - New Regulators, New Powers
Simon Gleeson, Clifford Chance
Key points:
There is a broad consensus across the public sector across the world that one of the major components of the financial regulatory regime of the future should be a macroeconomic regulator with power to affect – directly or indirectly – the day to day business of financial institutions and financial markets. The objectives of such a regulator are different from those of the existing regulators, and this article seeks to ask how such regulators could be established; what their powers would be; what regulatory tools they would be likely to use to achieve their policy aims; how they could be established at national or international level and what the likely consequences of these developments would be for banks and markets.
Biography, Simon Gleeson:
Simon Gleeson joined Clifford Chance in 2007 as a partner in the firm's International Financial Markets group. He specialises in financial markets law and regulation, was seconded to the Financial Services Authority in 1999-2000 to assist with the development of the market abuse regime, and advised the World Economic Forum on their report on their 2009 Report on The New Global Financial Architecture. He has advised Governments, regulators and public bodies as well as banks, investment firms, fund managers and other financial institutions on a wide range of regulatory issues. He has written numerous books and articles on financial regulation, and is the author of "International Regulation of Banking", shortly to be published by Oxford University Press.
Article: The Global Financial Crisis - one regulator or multiple regulators?
Vanessa Blackmore, Sullivan & Cromwell LLP and Esther Jeapes, Sullivan & Cromwell LLP
Article: Regulating cross-border banks in Europe: A comment on the de Larosière Report and a modest proposal
Professor Guido Ferrarini, University of Genoa and Filippo Chiodini, University of Genoa
Key points:
This article argues the following points:
• Current banking regulation does not fully support the crucial role of cross-border banks in financial market integration. Cross-border banks contribute in particular to the integration of retail markets, extending their services beyond national boundaries through branches and/or subsidiaries. Supervision, however, is fragmented at national level and regulation imposes additional regulatory costs on subsidiary structures, hindering the efficient allocation of resources through the internal capital market of banking groups.
• The de Larosière Report and the Turner Review partially addressed similar problems, suggesting a reform of the current European supervisory architecture. Both sets of proposals assign macro-prudential supervision and supervisory standard setting to newly established European authorities, leaving micro-prudential supervision to national authorities and colleges of supervisors. The de Larosière Report, in addition, proposes the coordination of colleges by a European Authority responsible for micro-prudential supervision, which would also be in charge of binding mediation.
• The current regulatory framework is based on cooperation and information exchange between national supervisors. Memoranda of Understanding and colleges, however, have proved insufficient, especially in crisis management of cross-border institutions. Moreover, obstacles to asset transferability between group entities do not allow for fully consolidated supervision, centralised compliance and risk management of cross-border banking groups.
• The new supervisory architecture would benefit from a more harmonised European regulatory framework, which would ease the coordination activities of supervisory colleges and the setting of common standards by the European Authority. An EC regulation on banking groups would set the conditions for recognition of the parent company’s management powers over the whole group and for asset transferability between the group entities, also obtaining regulatory neutrality with respect to the legal structure of the cross-border bank. The new regulation would also include rules on deposit insurance and lender of last resort, which should provide for a clear allocation of responsibilities, prevent regulatory arbitrage and reduce systemic risk.
Biography, Guido Ferrarini:
Guido Ferrarini graduated from the Genoa Law School in 1972 and obtained an LL.M. from Yale Law School in 1978. He was awarded a Dr. jur. h.c. from Ghent University in 2009. He is Professor of Business Law and Capital Markets Law at the University of Genoa and Director, Centre for Law and Finance.
He is Chairman of TLX (an Italian MTF and investment exchange) and Vice-Chairman of the European Corporate Governance Institute (ECGI), Brussels. He was a member of the Board of Trustees of the International Accounting Standards Committee (IASC), London.
He is the author of various books and articles in the fields of financial law, corporate law, and business law. He is a Visiting Professor at Ghent University (Chair Marcel Storme) and University College London. He was a Visiting Professor at Bonn University, Cambridge University, Columbia Law School, Frankfurt University, Hamburg University, NYU Law School.
Article: The courts, the financial crisis and systemic risk
Jeffrey Golden, Allen & Overy LLP
Key points:
What role would we wish to see our courts play in dealing with complex financial instruments, matters arising from the current financial crisis and, in due course, the new regulatory regime that we have been discussing and expect will emerge from this crisis? Do we think that the courts, as currently constituted, are prepared to play that role? Is there more, in any event, that the markets, the profession and academia can do to ready them?
Biography, Jeffrey Golden:
Jeffrey Golden joined Allen & Overy as a partner in the international capital markets department in 1994 after 15 years with the leading Wall Street practice of Cravath, Swaine & Moore. He is the founder partner of Allen & Overy's US law practice and senior partner in the firm's global derivatives practice and has extensive experience of a wide range of capital markets matters, including swaps and derivatives, international equity and debt offerings, US private placements and listings and mergers, acquisitions and joint ventures. He acts for the International Swaps and Derivatives Association and a broad range of commercial and investment banks, borrowers, arrangers, underwriters and issuers. He is a trustee of the International Bar Association Foundation and a member of the International Advisory Board of Columbia Law School, the Duke Global Capital Markets Center Advisory Board, the CEELI Institute Advisory Board and the Joint Editorial Board for International Law of the Uniform Law Commission and ABA International.