State of the Art and Research Design

This chapter begins by reviewing several bodies of scholarly works that are relevant to this research, notably, the international relations literature on regime complexity and the international political economy literature on financial regulation. It then discusses three mainstream theoretically informed explanations—a state-centric, a transgovernmental, and a business-led accounts—which can be useful to explain how regime complexity in derivatives was dealt with. Finally, it outlines the research design, the analytical framework, the methodology, the sources, the timeframe, and the empirical coverage. Empirically, this book examines all the main aspects concerning the regulation of derivatives markets, namely: trading, clearing and reporting derivatives; resilience, recovery and resolution of central counterparties; capital requirements for bank exposures to central counterparties and derivatives; margins for derivatives non-centrally cleared via central counterparties.

Introduction

This chapter outlines the theoretical and empirical puzzles that inform the book, its objectives, overall argument, and structure. This research sets out to explain the post-crisis international regulation of derivatives markets. In particular, it addresses three interconnected questions. What factors drove international standard-setting concerning derivatives post-crisis? Why did international regime complexity emerge? How was it managed and with what outcomes? The focus of this volume is on international standards, not the domestic implementation of these standards, or other domestic regulatory reforms concerning derivatives. This chapter also outlines the book’s theoretical and empirical contributions to the international relations literature on regime complexity and the international political economy literature on the regulation of finance.

Conclusions

This concluding chapter, first, carries out an overall assessment of the post-crisis international regulation of derivatives and teases out outstanding issues. It compares the regulatory dynamics of various elemental regimes concerning derivatives markets, underscoring similarities and differences, and explaining how regime complexity was managed with a view to promoting rule precision, stringency, and consistency. The second section summarizes the main theoretical and empirical findings of the research. The last section details the book’s wider empirical and theoretical contributions to the field as well as providing recommendations for future research. Among other things, further research could investigate and compare regime complexity in a variety of policy areas, inside and outside of the field of finance. It would be interesting to assess which explanations ‘travel’ better across policy areas, and which dynamics, instead, are more distinctive of a specific policy area.

International Standards for Bank Capital Exposures to CCPs and Derivatives

The elemental regime on bank capital for derivatives encompassed the credit valuation adjustment (CVA), the leverage ratio, and bank exposures to CCPs. Like for other parts of Basel III, the US and the UK were pace-setters internationally, promoting relatively precise, stringent, and consistent rules. The EU agreed on the need for higher capital requirements, but worried about negative implications for the provision of credit to the real economy. Networks of regulators were instrumental in furthering agreement amongst and within jurisdictions. They also fostered rules consistency through formal and informal coordination tools amongst international standard-setting bodies. The financial industry mobilized in order to reduce the precision and stringency of capital requirements, pointing out the need to consider capital reforms in conjunction with other post-crisis standards, notably, margins.

International Standards for CCPs

After the crisis, following the mandatory central clearing of derivatives, CCPs became crucial nodes of the financial system. Thus, new rules to improve their resilience, recovery, and resolution were issued. Initially, the division of work amongst international standard-setting bodies was unclear and international standards on CCPs lacked granularity. Subsequently, the division of work was clarified and relatively more precise, stringent, and consistent rules on CCPs were issued. The US and the UK were pace-setters internationally and partial first-movers domestically. The EU had preferences that were largely aligned with those of the US. Transgovernmental networks operating in international standard-setting bodies deployed formal and informal tools to promote regulatory consistency within the elemental regime on CCPs. Finally, financial interests mobilized in a variety of venues with a view towards shaping the content of the new standards on the basis of expected costs and benefits.

International Standards for the Reporting of Derivatives Trades

This chapter examines the elemental regime on the reporting of derivatives trades to repositories, including the harmonization of data format and aggregation, the politically charged issue of authorities’ access to data, and the technical issues concerning entities, products, and transactions identifiers. Initially, international standards for trade reporting were not considered as a priority and different domestic rules on trade reporting proliferated. Over time, relatively precise, stringent, and consistent international standards concerning entity, product, and transaction identifiers (i.e. the LEI, UPI, and UTI) were issued. The US was a first-mover at the domestic level and a belated pace-setter at the international level, with the support of the EU. A variety of transgovernmental networks of domestic financial regulators facilitated the harmonization of trade reporting, together with the International Standardisation Organisation (ISO) and private sector associations. The financial industry accepted the need for trade reporting, but complained about different domestic requirements that increased reporting costs.

Context and Empirical Patterns

This chapter provides the context for the rest of the book and establishes the outcomes to be explained. It first outlines the pre-crisis regulation of derivatives markets, which were mostly subject to private sector governance. It then argues that the international regulation of derivatives can be considered as a regime complex that is not a silo-like nor a hierarchal regime, by showing that a variety of international standard-setting bodies were involved, jointly or separately, with no clear hierarchical structure. These bodies issued a panoply of international standards, which were often nested, overlapping, parallel, or interlinking. Finally, this chapter provides an overview of the vast array of post-crisis international standards concerning derivatives and examines the precision, stringency, and consistency of various elemental regimes on derivatives.

International Margin Standards for Non-centrally Cleared Derivatives

The elemental regime on margins for derivatives not cleared through CCPs was added later on to the international regulatory agenda. The US was a pace-setter at the international level and a first-mover at the domestic level in promoting relatively precise, stringent and consistent margin requirements. The EU supported the US international standard-setting efforts, but adopted domestic regulation after international rules were set. There were no foot-draggers, even though several jurisdictions on the fringe were reluctant followers. Domestic regulators gathered in international standard-setting bodies facilitated the ironing out of differences amongst and within jurisdictions. Transgovernmental networks also fostered rule consistency, helping to manage the regime complexity resulting from several interlinked elemental regimes on derivatives. Margins were heavily contested by the financial industry, which mobilized to make them less precise and stringent. Private actors also urged regulators to consider this reform in conjunction with other post-crisis standards, notably, capital requirements.

International Standards for Derivatives Trading and Clearing

This chapter discusses the elemental regimes on derivatives trading and clearing. These international standards remained rather ‘thin’ due to the absence of pace-setting jurisdictions and the foot-dragging of some jurisdictions; disagreements amongst regulators; and the push back from the financial industry. Furthermore, exchange and platform trading were not crucial to mitigate systemic risk. Clearing via central counterparties was crucial to mitigate systemic risk. However, other interlinked standards, notably, bank capital and margin requirements, were used to promote central clearing. Precise, stringent, and consistent international standards were not sponsored by the ‘great powers’, which adopted instead domestic regulatory reforms that had considerable extraterritoriality. Securities market regulators gathered in the IOSCO found it difficult to reconcile different views among more than one hundred member jurisdictions. Furthermore, these regulatory reforms—first and foremost centralized trading—were contested by parts of the financial industry because of their distributional implications.