Transnational Legal Ordering and Regulatory Conflict : Lessons from the Regulation of Cross-Border Derivatives

This paper is about the theory and practice of transnational legal ordering. It seeks to gain insight into how transnational legal orders advance by examining one particular problem: the regulation of over-the-counter derivatives. It focuses on events following the global financial crisis, which exposed the deficiencies of the existing regulatory order in identifying and containing the risks created by trading in those securities. In the aftermath of the crisis, the cross-border systemic risk created by OTC derivatives trading was characterized as a problem of global dimension that necessitated a global response. A wide array of actors and institutions, both domestic and international, mobilized quickly to craft a legislative and regulatory response. Given the catastrophic nature of the crisis, and the general manifestation of political will to address the problem, one might have predicted the successful development and institutionalization of shared norms regulating derivatives trading. That move, however, has been limited. The paper begins by outlining the regulatory challenges resulting from the globalization of securities markets and describing the evolution of the international regulatory regime. It suggests that to the extent a transnational order has emerged in that area, it is characterized not by substantive norms that have settled across multiple national systems, but rather by conflicts norms guiding the allocation of regulatory authority among national systems. The paper then turns to the actions of regulators in the aftermath of the financial crisis. It analyzes the rulemaking process in the United States and elsewhere, considering the various actors and organizations involved in that process — from national regulatory agencies to international standard-setting bodies to multinational regulatory networks. This section investigates whether the financial crisis has precipitated the implementation of shared substantive norms within multiple legal systems. It concludes that it has not, and explores certain obstacles that have impeded the development of an effective transnational legal order in this area. The paper concludes with some observations about how the political economy of particular regulatory regimes intersects with the theory of transnational legal ordering