Pablo Iglesias-Rodriguez

The regulation of cross-border clearing and settlement in the European Union from a legitimacy perspective

Post-trading activities such as clearing and settlement (C&S) constitute a central element in the integration of European financial markets. However, unlike other areas of financial services, C&S has received little legislative and regulatory attention and, as a result, important barriers to the cross-border provision of C&S services persist in the European Union. In order to remove some of these barriers, the financial industry created, under the auspices of the European Commission, the European Code of Conduct for Clearing and Settlement, a self-regulatory instrument aimed at achieving a smoother provision of cross-border C&S services. This paper uses the concepts of input/output legitimacy to analyse the Code’s representative nature and effectiveness. It shows that, first, the Code has not received input from all the relevant constituencies potentially affected by C&S, and second, that there are serious threats to future compliance with the Code related to the competitive pressures of European financial markets. The paper also identifies the proposals to regulate C&S facilities at EU level as well as the new European supervision authorities in the financial field as elements which may highly contribute to the input/output legitimacy of cross-border C&S rules in the EU.

From One-directional to Multi-directional Paradigm Shift

In the existing literature, the concept of paradigm has traditionally been interpreted as a one-dimensional phenomenon with a potential impact on other dimensions which are not intrinsic to the paradigm. For example, in the view of Kuhn paradigms are ‘universally recognized scientific achievements that for a time provide model problems and solutions to a community of practitioners’.

Has the Financial Crisis Led to a Paradigm Shift

Before the outbreak of the global financial crisis (GFC) in 2007, the ways in which financial markets, institutions and actors functioned reflected, to a great extent, specific paradigms about how financial markets and institutions ought to work and how investors behave. Markets were perceived as informationally efficient, and financial innovation was considered an effective tool of risk management and economic growth (see also Greenspan 2000). Equally, self-regulation of the markets by the financial industry was considered an effective regulatory tool. The pro-self-regulatory approach of policy-makers before the crisis was patent in the opposition of the US Treasury, the Securities and Exchange Commission (SEC) and the Federal Reserve to the attempts of the Commodity Futures Trading Commission (CFTC) to strengthen the public regulation of over-the-counter derivatives in the late 1990s (Nutting 1998). Gradually, in the last couple of decades, politics had come to be seen as subordinate to the markets. Ever since Francis Fukuyama’s post-1989 ‘end of history’ idea became prevalent (Fukuyama 1992), suggesting that Western-style liberal democracy combined with capitalism had prevailed over other socio-economic paradigms, the neoliberal version of free market economy with a limited role for the state became the dominant one. In the second half of the 2000s, markets were increasingly less subject to political scrutiny while regulatory institutions and mechanisms were further relaxed. Nobody questioned the entanglement of vested interests within such institutions and mechanisms, and financial rating agencies became hegemonic in making the day or predicting doom and gloom for entire countries and economic activity sectors. International organisations such as the Organisation for Economic Co-operation and Development (OECD) and the World Bank or the International Monetary Fund (IMF) did little to effectively contest this subtle erosion of their power in favour of more private and even less accountable private actors such as banks, multinationals and rating agencies. The roles of the IMF and of the World Bank before the GFC generated much dissatisfaction among global civil society (Higgott 2012: 20).

Paradigm Shift in Financial-Sector Policymaking Models: From Industry-Based to Civil Society-Based EU Financial Services Governance?

Before the Global Financial Crisis started in 2007, the financial and economic policies of several jurisdictions with ‘highly developed’ financial markets were, to a large degree, based on two economic theories, namely the Efficient Market Hypothesis and the Rational Expectations Hypothesis. The Efficient Market Hypothesis is a very influential economic idea formulated by Eugene Fama in his seminal work Random Walks in Stock Market Prices (Fama 1965). One of the postulates of the Efficient Market Hypothesis is that the prices of financial instruments reflect all the available information; hence, ‘in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value’ (Fama 1965, p. 56). As to the Rational Expectations Hypothesis, it was first proposed by J. F. Muth in his paper Rational Expectations and the Theory of Price Movements (Muth 1961) where he claimed that economic outcomes reflect, to some extent, the expectations of economic agents (Muth 1961, p. 316). The Rational Expectations Hypothesis constitutes a pillar of the Efficient Market Hypothesis; for instance, according to it, the price of financial instruments partially depends on what the buyers and sellers of those instruments expect it to be in the future (Sargent 2008). These two theories were at the core of the so-called equilibrium paradigm, according to which financial markets tend towards a state of equilibrium (Soros 2008, p. vii).

The political economy of global competition law and policy : an institutional approach

This ebook brings together political scientists and legal scholars with a view to explore the transformations that affected the rather stable institutional settlement of EU competition law and in particular the emergence of a transnational field of competition policy since the 1990s. Beyond its insistence on “transnational fields” and the on-going conflicts and competitions that structure its dynamics, the book also suggests a new entry: the power-knowledge nexus that considers the production as much as the import-export of ideas, theories and “models” about competition policies as one essential lever through which these battles are fought.