A History of Financial Technology and Regulation: From American Incorporation to Cryptocurrency and Crowdfunding by Seth C. Oranburg

The regulation of finance is central to the growth and development of every economy. Financial regulation determines the overall character of the financial system, the relationship between borrowers and savers, the allocation of capital, and the macroeconomic performance of the economy. Financial market regulation is distinct from regulation of other sectors of the economy because of the essential infrastructural role of finance—all other sectors of advanced economies depend on the financial system. Despite its enormous importance, financial regulation normally has low political salience. Except in times of crisis, most voters—and therefore politicians—have relatively little interest in the matter. This can be attributed in part to the complex and technical nature of financial markets and regulation, which relatively few people understand well. Low political salience facilitates a regulatory process that is very heavily shaped by regulators (technocrats) and the industry they regulate, with only minor direction from elected political leaders. In the long history of capitalism, bank and financial system crises have been regular occurrences. Regulation, or regulatory failure, is often seen as a cause of crises, but regulatory change is also the response. Thus any given financial regulatory regime is never settled for long. After the Great Depression, advanced capitalist economies introduced highly restrictive financial regulatory regimes designed to minimize systemic risk from bank failures. In the postwar period, restrictive regulatory regimes were combined with capital controls that limited international movements of capital. The postwar Bretton Woods international monetary regime stabilized fixed exchange rates through such controls and, when necessary, lending by the International Monetary Fund (IMF) to countries that could not pay for their external debts. Starting with the collapse of the Bretton Woods regime in the early 1970s, all the advanced economies started liberalizing financial market regulation and removing capital controls as part of a broader shift toward a neoliberal economic philosophy. These deregulatory measures brought about a dramatic transformation of domestic financial systems and the reemergence of a dynamic and rapidly growing international financial market. Such dynamic and internationalized financial market was, in large part, the root cause of the early-21st-century financial crisis. The Great Financial Crisis of 2008 precipitated widespread review and revision of financial market regulations at both the domestic and international levels. These revisions include a shift from private self-regulation to state-driven regulation of financial markets, the centralization of regulation at the level of the European Union, and a closer cooperation between states in forging international regulatory standards. Nonetheless, despite the dramatic growth of the international financial market and transnational efforts to coordinate regulation, financial regulation remains overwhelmingly a domestic affair.

Is the United States losing its position as the world's leading capital market? Recent statistics suggest that U.S. stock exchanges have been losing ground to foreign stock exchanges. The share of equity raised in global public markets represented by the New York Stock Exchange (NYSE), NASDAQ, and the American Stock Exchange (AMEX) combined dropped from 28.8% in 2002 to 23.0% in 2009.1 1Comm. on Capital Markets Regulation, The Competitive Position of the U.S. Public Equity Market 7 (Dec. 4, 2007), available athttp://www.capmktsreg.org/pdfs/The_Competitive_Position_of_the_US_Public_Equity_Market.pdf; World Fed'n of Exch., 2009 Annual Report and Statistics 118, available athttp://www.world-exchanges.org/files/statistics/excel/WFE09%20final.pdf. Foreign delistings from the NYSE rose from 3.9% of all listed foreign companies in 1997 to 8.7% in 2009.2 2Comm. on Capital Markets Regulation, supra note 1, at 21; World Fed'n of Exch., supra note 1, at 104–05. The U.S. market capitalization decreased from 47.8% of the total global market capitalization in 1999 to 31.6% in 2009.3 3 Brown, Elizabeth F., The Tyranny of the Multitude Is a Multiplied Tyranny: Is the United States Financial Regulatory Structure Undermining U.S. Competitiveness?, 2 Brook. J. Corp. Fin. & Com. L. 369, 393– 94 (2008); World Fed'n of Exch., supra note 1, at 102. Market capitalization is as measured by the World Federation of Exchanges. Although in 2000, nine of the top ten initial public offerings (IPOs) in the world took place on U.S. exchanges, by 2005, only one of the twenty-five largest IPOs took place on a U.S. exchange.4 4Eric Pan, Why the World No Longer Puts Its Stock in Us 2–3 (Dec. 13, 2006) (Benjamin N. Cardozo Sch. of Law Jacob Burns Inst. for Advanced Legal Stud. Working Paper No. 176), available athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=951705. In the first half of 2010, Asian exchanges dominated equity IPOs, with $22.6 billion raised on the Shenzhen Stock Exchange and US$8.9 billion raised on the Shanghai Stock Exchange as opposed to $6.7 billion on the NYSE.5 5World Fed'n of Exch., Market Highlights For First Half-Year 2010, 8, available athttp://www.world-exchanges.org/files/file/stats%20and%20charts/July%202010%20WFE%20Market%Highlights.pdf. Commentators argue that one reason for the declining importance of the U.S. stock markets is the high level of regulation in the United States, especially after the passage of the Sarbanes-Oxley Act in 2002.6 6Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat 745 (codified in scattered sections of 11, 15, 18, 28, and 29 U.S.C.) [hereinafter SOX]. Proponents of regulatory competition argue that the U.S. securities regulatory regime is too onerous and that companies should, instead, be allowed to choose which jurisdiction's securities law should apply to them. See, e.g., Choi, Stephen, Regulating Investors Not Issuers: A Market-Based Proposal, 88 Cal. L. Rev. 279 (2000); Choi, Stephen J. & Guzman, Andrew T., Portable Reciprocity: Rethinking the International Reach of Securities Regulation, 71 S. Cal. L. Rev. 903 (1998); Coffee, John C., Racing Towards the Top?: The Impact of Cross-Listings and Stock Market Competition on International Corporate Governance, 102 Colum. L. Rev. 1757 (2002); Palmiter, Alan R., Toward Disclosure Choice in Securities Offerings, 1999 Colum. Bus. L. Rev. 1; Romano, Roberta, Empowering Investors: A Market Approach to Securities Regulation, 107 Yale L.J. 2359 (1998). But there is also a concern that regulatory competition will lead to a race to the bottom. See Cox, James D., Choice of Law Rules for International Securities Transactions?, 66 U. Cin. L. Rev. 1179, 1186 (1998) (arguing the parties should not be able to avoid U.S. securities regulation in private securities transactions partly because there is a "need to protect investors from themselves"). For more on the regulatory competition debate, see Jackson, Howell E. & Pan, Eric J., Regulatory Competition in International Securities Markets: Evidence from Europe in 1999—Part I, 56 Bus. Law. 653, 658 (2001). In response to comment letters from many foreign private issuers requesting exemptions from some of the requirements of SOX, the Securities and Exchange Commission (SEC) did grant certain accommodations. In addition, in 2007, the SEC adopted a rule that allowed certain foreign private issuers to deregister and no longer be subject to U.S. securities regulation (the "deregistration rule"). With the recent global financial crisis, however, there have been renewed calls for more stringent U.S. regulation to prevent future financial crises.7 7 See, e.g., Coffee, John C. & Sale, Hillary A., Redesigning the SEC: Does the Treasury Have a Better Idea?, 95 Va. L. Rev. 707 (2009); Cunningham, Lawrence A. & Zaring, David, The Three or Four Approaches to Financial Regulation: A Cautionary Analysis Against Exuberance in Crisis Response, 78 Geo. Wash. L. Rev. 39 (2009). The current crisis has rattled world markets, resulting in, among other events, the bankruptcy of Lehman Brothers and some foreign governments needing International Monetary Fund packages.8 8 See, e.g., Davidoff, Steven M. & Zaring, David, Regulation by Deal: The Government's Response to the Financial Crisis, 61 Admin. L. Rev. 463 (2009); Okamoto, Karl S., After the Bailout: Regulating Systemic Moral Hazard, 57 UCLA L. Rev. 183 (2009). In a November 17, 2009 speech, SEC Commissioner Kathleen Casey stated that one of the lessons of the current financial crisis is that financial stability depends on investor confidence, which in turn depends on the transparency of financial statements.9 9Kathleen L. Casey, Comm'r, SEC, Lessons from the Financial Crisis for Financial Reporting, Standard Setting and Rule Making (Nov. 17, 2009), available athttp://www.sec.gov/news/speech/2009/spch111709klc.htm. As Congress had directed the SEC to review and study fair value accounting standards, the SEC delivered a report that included several recommendations on changes to fair value accounting standards to Congress which may result in new securities regulations.10 10 Id. In an increasingly global market, it is important for the United States to understand—before undertaking further reforms—the effects of increased securities regulation on the competitiveness of its stock markets. While U.S. securities laws should be reformed to decrease the risk of, and mitigate the effects of, future financial crises, absent a global harmonized regulatory regime, the United States should be careful to minimize the costs imposed by U.S. securities regulation on foreign private issuers.11 11"Foreign private issuer" is defined in Rule 405 promulgated under the Securities Act of 1933 and Rule 3b-4 promulgated under the Securities Exchange Act of 1934. 17 C.F.R. §§ 230.405, 240.3b-4 (2010). The United States benefits from foreign private issuers listing on domestic exchanges. And, U.S. investors find it easier to invest in shares of foreign companies if they are listed in the United States. In addition, foreign private issuers listed in the United States are subject to U.S. securities law, which provides better investor protection than many comparable foreign laws.12 12 See infra Part I.A. The experience of foreign private issuers accessing the U.S. market in the 2000s, especially after SOX and the deregistration rule, provides useful guidance regarding the effect of strengthened U.S. securities law on the attractiveness of U.S. markets for foreign private issuers. In this article, I examine the impact of post-SOX strengthening of U.S. securities law on the conduct of foreign private issuers. Part I provides some general background about foreign private issuers listing in the United States. It starts by discussing the benefits to the United States of having foreign private issuers list on U.S. exchanges. Part I also explores the costs and benefits of listing in the United States for foreign private issuers, especially in light of potential flowback13 13"Flowback" refers to American investors choosing to convert their American Depository Receipts (ADRs) into ordinary shares that are traded on non-U.S. stock markets. problems and the increasing availability of foreign exchanges as alternatives to the U.S. exchanges. Next, in Part II, I discuss the legal regime facing foreign private issuers, looking at the SEC's pre-SOX attempts to make the U.S. markets more attractive to them, at the controversy over the application of SOX to foreign private issuers, and at the SEC's post-SOX accommodations for foreign private issuers. Part II also reviews prior studies on SOX's effects on foreign private issuers. Part III then describes my three studies of foreign private issuers' behavior after SOX. The first study looks to see if, in a given region, the median relative U.S. trading volume14 14"Relative U.S. trading volume" refers to the trading volume the issuer obtains in the United States over the trading volume the issuer obtains in its home market. "Trading volume" is the number of shares of a security traded in a given market during a given day. For details on the calculation for relative U.S. trading volume, see infra Part III.A.1. of issuers that delist tends to be lower than the median relative U.S. trading volume of issuers that do not and to see which region's issuers are likely to find the United States to be a less important market. For each of the six regions15 15The six regions are East Asia, Europe, Latin America, Japan, Israel, and Australia. See infra Part III.A.1. I studied, issuers who remain listed on the U.S. exchanges as of January 31, 2010 tend to have lower relative U.S. trading volumes than those who voluntarily delisted16 16Issuers who voluntarily delisted are those who exited the U.S. market other than (i) those who were delisted by a U.S. exchange or (ii) those who were merged into another company. before January 31, 2010. Issuers from developed countries tend to have lower relative U.S. trading volumes. My second study finds that more issuers from regions with lower relative U.S. trading volume voluntarily delisted from the United States after the passage of SOX. My third study reviews SEC filings, cataloging the reasons foreign private issuers give for delisting. Many of the delisting issuers stated in press releases filed with the SEC that their low trading volumes in the United States did not justify the costs of being listed in the United States, especially after the additional regulatory burden imposed by SOX. Finally, I conclude by looking at the implications of the finding that issuers from developed regions with low relative U.S. trading volumes are more likely to delist as a result of increased securities regulation imposed by SOX. Because issuers from more developed countries are better investment prospects for U.S. investors, the SEC should consider granting these foreign issuers exemptions from any new U.S. securities regulations, to encourage them to continue listing in the United States. This part provides some general background, discussing the reasons the United States wants to encourage foreign private issuers to list on its exchanges. To maintain these benefits, the United States must ensure that a U.S. listing provides foreign private issuers with more benefits than costs, especially as foreign private issuers may face flowback problems, and foreign securities exchanges are increasingly becoming viable alternatives to U.S. exchanges. This part discusses the benefits and costs for foreign private issuers listing in the United States. Understanding both the benefits to the United States of having foreign issuers list on U.S. exchanges and what foreign private issuers perceive to be the benefits and costs of listing in the United States then assists in a determination of which foreign private issuers should be encouraged to list in the United States and how the U.S. securities regulations might be used to encourage these issuers to list. U.S. retail investors and the overall U.S. capital markets benefit from foreign private issuers listing in the United States. Investing in foreign companies provides investors with diversification, allowing them to select the optimal trade-off between risk and return.17 17U.S. Chamber of Commerce Comm'n on the Regulation of U.S. Capital Markets in the 21st Century, Report and Recommendations 39 (Mar. 2007), available athttp://library.uschamber.com/sites/default/files/reports/0703capmarkets_full.pdf [hereinafter U.S. Chamber of Commerce Comm'n Report]; Jackson, Howell E., A System of Selective Substitute Compliance, 48 Harv. Int'l L.J. 105, 111 (2007); Tafara, Ethiopis & Peterson, Robert J., A Blueprint for Cross-Border Access to U.S. Investors: A New International Framework, 48 Harv. Int'l L.J. 31, 41 (2007). Further, foreign companies are attractive to U.S. retail investors because many of the fastest-growing companies are foreign companies.18 18U.S. Chamber of Commerce Comm'n Report, supra note 17, at 39; Davidoff, Steven M., Regulating Listings in a Global Market, 86 N.C. L. Rev. 89, 115– 16 (2007); Jackson, supra note 17, at 111; Tafara & Peterson, supra note 17, at 48. U.S. retail investors can invest abroad but they face certain barriers. First, there are risks associated with investing in a foreign market.19 19Jackson, supra note 17, at 112; Tafara & Peterson, supra note 17, at 41–42. U.S. retail investors investing abroad may be unaware that they are investing in securities not subject to SEC oversight.20 20Jackson, supra note 17, at 112; Tafara & Peterson, supra note 17, at 42. Foreign countries may not have an effective legal enforcement regime.21 21Tafara & Peterson, supra note 17, at 42. It is easier and less risky for U.S. retail investors to invest in foreign companies if they are listed in the United States.22 22U.S. Chamber of Commerce Comm'n Report, supra note 17, at 39; Tafara & Peterson, supra note 17, at 41. Listing in the United States subjects the foreign private issuer to U.S. securities law, which gives better investor protection than comparable law in many foreign jurisdictions.23 23Tafara & Peterson, supra note 17, at 42; Doidge, Craig G. et al., Why Are Foreign Firms Listed in the U.S. Worth More?, 71 J. Fin. Econ. 205, 209 (2004). Second, there are transactional costs associated with investing abroad. To invest abroad, U.S. investors often either have to trade on a foreign exchange through a U.S.-registered broker, thereby having to go through two layers of intermediaries, or have to open an account with a foreign broker.24 24Jackson, supra note 17, at 111; Tafara & Peterson, supra note 17, at 47–48. U.S. retail investors may also lack adequate information about these foreign companies because foreign private issuers and foreign financial broker-dealers that do not comply with SEC registration and compliance requirements are not able to directly solicit U.S. retail investors.25 25U.S. Chamber of Commerce Comm'n Report, supra note 17, at 39; Jackson, supra note 17, at 111; Tafara & Peterson, supra note 17, at 48. Maintaining an environment friendly to foreign private issuers is important to the United States remaining the global financial center. Foreign private issuers constitute a significant portion of the IPOs and listings in the United States.26 26Brown, supra note 3, at 395. U.S. exchanges benefit from being able to obtain listing and trading fees, one of their major sources of revenue, from foreign private issuers that list on them.27 27Davidoff, supra note 18, at 127–28. For the schedule of fees paid to NYSE, see http://www.nyse.com/regulation/nyse/1147474807417.html (last visited Oct. 15, 2010). Regarding NASDAQ's fees, see NASDAQ, Listing Standards and Fees ( July 2010), available athttp://www.nasdaq.com/about/nasdaq_listing_req_fees.pdf. Keeping the U.S. markets attractive to foreign private issuers is important for maintaining the dominance of U.S. financial services sector, an important sector for the United States. One out of every nineteen Americans works in financial services and the industry represents eight percent of the U.S. gross domestic product.28 28Michael R. Bloomberg & Charles E. Schumer, Sustaining New York's and the US' Global Financial Services Leadership 10 ( Jan. 2007), available athttp://www.nyc.gov/html/om/pdf/ny_report_final.pdf. The financial services industry is also one of the fastest-growing sectors in the U.S. economy.29 29 Id. Continued growth in this industry provides the United States with jobs and tax revenues.30 30 Id. at 9–10. To obtain such benefits, the United States needs to make sure that the benefits of listing in the United States for desirable foreign companies outweigh the costs. Foreign private issuers typically list in the United States for financial considerations such as increased liquidity, potentially lower cost of equity capital, a desire to increase their U.S. shareholder base, and ability to raise money from equity.31 31 See G. Andrew Karolyi, What Happens to Stocks That List Shares Abroad? A Survey of the Evidence and Its Managerial Implications 34–35 (Sept. 1996) (NYSE Working Paper No. 96-04), available athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1612; Bancel, Franck & Mittoo, Usha R., European Managerial Perceptions of the Net Benefits of Foreign Stock Listings, 7 Eur. Fin. Mgmt. 213, 224– 25 (2001) (surveying European managers); Fanto, James A. & Karmel, Roberta S., A Report on the Attitudes of Foreign Companies Regarding a U.S. Listing, 3 Stan. J.L. Bus. & Fin. 51, 63– 66 (1997); Mittoo, Usha R., Managerial Perceptions of the Net Benefits of Foreign Listing: Canadian Evidence, 4 J. Int'l Fin. Mgmt & Acct. 40, 58 (1992) (surveying managers of Canadian companies cross-listed in the United States and the United Kingdom); Pagano, Marco et al., The Geography of Equity Listing: Why Do Companies List Abroad?, 57 J. Fin. 2651, 2685– 87 (2002) (looking at companies listed on ten major European exchanges and seeing who listed in the United States rather than in Europe). Listing in the United States also provides foreign private issuers with acquisition currency, prestige, and publicity.32 32 See Bancel & Mittoo, supra note 31, at 224–25; Fanto & Karmel, supra note 31, at 63–66. Some foreign private issuers list because all the companies in the relevant industry list in the United States.33 33 See Fanto & Karmel, supra note 31, at 52, 63–66. Another potential reason to list in the United States is that U.S. investors may be better able to identify which of the new, innovative firms are likely to succeed.34 34 See Asher Blass & Yishay Yafeh, Vagabond Shoes Longing to Stray: Why Foreign Firms List in the United States 16 (unpublished manuscript, on file with author), available athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=248948. Previous studies have found that foreign private issuers' perceptions of the benefits of listing in the United States have a basis in reality. Studies have found that cross-listing in the United States leads to increased liquidity,35 35 See Foerster, Stephen R. & Karolyi, G. Andrew, International Listings of Stocks: The Case of Canada and the US, 24 J. Int'l Bus. Stud. 763, 773– 79 (1993) (looking at fifty-three Toronto Stock Exchange–listed stocks that listed on U.S. exchanges from 1981 to 1990); Karolyi, supra note 31, at decreased to domestic market See Foerster, Stephen R. & Karolyi, G. Andrew, The of Market and on Evidence from Foreign Stock Listing in the United States, J. Fin. (looking at firms from countries that listed in the United States between and Karolyi, supra note 31, at But see et al., of to Markets and Its on J. Int'l from between and that total risk decreased for firms but not for firms after the of the and increased See et al., International Cross-Listings and J. Fin. & Analysis (2002) from a study of a one before and one after a listed in the NYSE or Stock Exchange and from the number of a is in the and the Financial during the in that and increase after listing on the for foreign private issuers. to the cost of capital and increase share for foreign private issuers, both the and the of these effects are See & The Impact of an NYSE Listing on the Global of Stocks 2–3 (NYSE Working Paper No. foreign stocks listed on the NYSE between and and that stocks from developed markets on increase in home market value of trading after stocks from markets experience only a increase in home market et al., The Market Impact of The Case of 2 (1998) (looking at eight stocks listed in the United States or traded on markets between and and finding no of listing R. & Market and the of Capital in International Equity 35 J. Fin. & Analysis from foreign stocks that their first between and that cross-listing the cost of capital for foreign & Karolyi, supra note at that foreign stocks a significant during the before listing and also during the listing but that shares on during the after Karolyi, supra note 31, at 35 that share increased in the first after listing but that during the after listing The Market to International Evidence from J. Fin. Econ. from foreign stocks that their first between and that the of a listing were for firms that list on major U.S. & E., of Foreign Listings on U.S. J. Int'l Bus. Stud. effect from equity of foreign firms listed on the NYSE and the between and But see & J., Are to Rev. Fin. Stud. there an increase in there a for to several after listing and there of a effect on for firms While private for foreign private issuers tend to their home market on major U.S. public exchanges tend to the relevant et al., supra note at Foerster, Stephen R. & Karolyi, G. Andrew, The of Global Equity Offerings, 35 J. Fin. & Analysis Foreign private issuers obtain more of a if they from markets with lower accounting standards or lower of investor et al., supra note at & Karolyi, supra note at The increased may be because investors see a to list on an exchange with a environment as a of about its future 41 See C. & Disclosure and Listing on Foreign Stock J. & Fin. Listing in the United States may also increase the value of the shares because it the ability of a shareholder to private benefits from the See Doidge, Craig U.S. Cross-Listings and the Benefits of Evidence from J. Fin. Econ. that foreign firms that list in the United States and are subject to U.S. securities regulation tend to have lower than firms that do especially if these foreign firms are from countries with shareholder et al., supra note See also & Benefits of International J. Fin. (2004). and because it in non-U.S. firms and increased et al., and Does Listing in the United States a and Market 41 J. Acct. Foreign private issuers that list in the United States tend to their equity to and to into than do foreign companies not listed in the United Evidence from of U.S. The of Stock as an (Sept. (unpublished manuscript, on file with author), available & Cross-Listings and Evidence, 34 Fin. Mgmt. Firms from regions list in the United States for For European issuers, the reason to list in the United States is better by and the desire to obtain acquisition See Jackson, Howell E. & Pan, Eric J., Regulatory Competition in International Securities Markets: Evidence from Europe in 1999—Part II, 3 Va. L. & Bus. Rev. 224– 25 (2008); see also et al., supra note 31, at that of listing in the United States are the of and investors, than in Europe, and a The reasons firms list in the United States on their firms list to they can comply with the U.S. securities law requirements and to and is a less important because the market is M. Regulation of Issuers U.S. Public Equity Markets (2002) (unpublished manuscript, on file with on the other list to of increased and relative See at For issuers from other Asian the reason to U.S. markets is better from the liquidity, by 48 See Regulatory Competition in International Securities Markets: Evidence from in and (2002) (unpublished manuscript, on file with Regulatory Competition in International Capital Markets: Evidence from in 3 J.L. & Bus. 61 Asian issuers have found that they to go to the U.S. market for transactions over See at 13, Some Asian and firms list in the United States because they their home listing supra note at In addition, the has encouraged some to list in the United States to to the of their for to comply with U.S. securities listed must effective Id. at 21; supra note at Finally, listing in the United States firms to convert their to U.S. allowing them to obtain acquisition supra note at firms list in the United States to be subject to lower if they are listed on a U.S.

The global financial crisis that started in 2007 sparked several academic debates about the role that financial sector regulators played in the crisis and prompted policy reforms in the financial supervision architectures of several countries. This book focuses on the question of what accountability, independence, transparency and, more generally, governance mechanisms applicable to financial regulators can better contribute to building responsive, responsible and effective regulatory and supervisory frameworks that tackle the weaknesses of the pre-crisis regimes. It re-visits the concepts of accountability and independence of financial regulators as well as the main economic theories underlying financial services policy-making, in light of the crisis experience. In addition, it critically examines the post-crisis institutional frameworks of financial regulation and supervision in the EU, the US and Canada with a view to assessing whether the financial regulators of the post-global financial crisis era are well suited to effectively address the challenges and threats that global financial markets pose to the stability, integrity and good functioning of financial systems as well as to the protection of consumers, investors and society at large.Topics addressed in this volume include:- The theoretical foundations of accountability and independence in financial regulation after the crisis; - The influence of economic theory on the quality of financial regulation and supervision;- Accountability in the European Banking Union and the European System of Financial Supervision;- Post-crisis structures of financial regulation in the US and their impact on consumer/investor protection and financial stability;- The role of financial supervision architecture in the stability of the Canadian financial system. The contributors to this volume are economists, lawyers, political scientists and sociologists from both academia and practice. Therefore, this book will be highly relevant to scholars and practitioners in these areas.

Contents: Preface 1. The Global Financial Crisis and its Implications for Financial Sector Reform and Regulation in Asia David G. Mayes and Peter J. Morgan PART I: FINANCIAL SURVEILLANCE AND REGULATION TO PREVENT CRISES 2. Regulating Systemic Risk Masahiro Kawai and Michael Pomerleano 3 Enlisting Macroprudential and Market Regulatory Structures to Strengthen Prudential Supervision Larry D. Wall 4. Dynamic Provisioning: Some Lessons from Existing Experiences Santiago Fernandez de Lis and Alicia Garcia-Herrero 5. Securitized Products, Financial Regulation and Systemic Risk Mariko Fujii 6. Liberalization and Regulation of Capital Flows: Lessons for Emerging Market Economies Rakesh Mohan and Muneesh Kapur PART II: REGIONAL FINANCIAL MONITORING AND COORDINATION 7. The Financial Crisis: A Wake-up Call for Strengthening Regional Monitoring of Financial Markets and Regional Coordination of Financial Sector Policies? Adalbert Winkler 8. Regional Monitoring of Capital Flows and Coordination of Financial Regulation: Stakes and Options for Asia Michael G. Plummer PART III: FINANCIAL CRISIS MANAGEMENT AND RESOLUTION 9. The Role of State Intervention in the Financial Sector: Crisis Prevention, Containment and Resolution Yoon Je Cho 10. The Role of the State in Managing and Forestalling Systemic Financial Crises: Some Issues and Perspectives Charles Adams PART IV: PROMOTION OF ASIAN BOND MARKETS 11. Developing Asian Local Currency Bond Markets: Why and How? Mark M. Spiegel 12. Foreign Bond Markets and Financial Market Development: International Perspectives Jonathan A. Batten, Warren P. Hogan and Peter G. Szilagyi

This chapter describes the overall legal and regulatory framework supporting financial markets in Hong Kong. This is developed in tandem with, and in response to, their characteristics. Regulatory reforms in the financial markets of Hong Kong have typically been developed after a financial crisis and market failure. However, while Hong Kong has not always had effective systems of financial regulation, it has been steadily strengthening its regulatory framework both for financial markets and institutions. This chapter argues that the increasing effectiveness of its legal and institutional regulatory framework has enhanced its development as an international financial centre over the past two decades and will be vital to its continued success in the future. The chapter concludes by outlining the common objectives of the Hong Kong financial regulators today.

In testimony on April of 2012 before the House Financial Services Committee, U.S. Securities and Exchange Commission (SEC) Chairman, Mary Schapiro, stated that effective information sharing between financial market actors and their regulatory bodies is critical to fulfilling the regulatory obligations of the SEC. The 2008 financial crisis is recognized as a show case for the risks to the stability of the markets that ineffective information sharing among supervisory authorities represents. This paper constitutes a preliminary exploration of the challenges facing financial regulators building on prior research in the computing and information science community (CIS). Current literature as well as data from a recent study of financial market regulation is used to identify key actors in financial market regulation information sharing relationships and to begin to outline the challenges faced in this unique context and the resulting risk if those challenges go unaddressed. A recently developed theoretical framework for cross-boundary information sharing (Garcia et al 2007) is used to present insights about challenges and risks from the literature and the field.

The Upcoming Millennial’s Recession: Legal and Regulatory Imperatives for a New Global Financial Architecture and Authority

The response to the global financial crisis (GFC) of 2007–2008 has famously been described as the problem of too-big-to-fail.1 In the middle of a worsening crisis, financial regulators had to recognize that bank bailouts were the only way to stabilize financial markets. One of the two priorities of regulatory reforms post-crisis was to address the too-big-to-fail problem by introducing a resolution procedure for systemically important financial institutions.2 Among financial regulators (with the notable exception of the USA), contingent convertible bonds (CoCos) were seen as a major innovation to address the too-big-to-fail problem and quickly became a popular “bail-in” instrument to facilitate the instant recapitalization of a distressed bank. The quick deleveraging that could be achieved with CoCo conversions would serve the dual roles of recapitalizing “a going-concern bank” and reducing the resolution costs for a “gone concern” bank. During the press conference on March 19, 2023 the Swiss Financial Market Supervisory Authority (FINMA) announced that, as part of the emergency package in response to the loss of trust and the run on Credit Suisse, the contingent convertible bonds that were part of the Credit Suisse Additional Tier 1 (AT1) regulatory capital had been written off.3 The decision by FINMA took many by surprise and provoked a flood of negative market commentary, with the commonly stated view that conversion violated the priority order of claims between debt and equity. Indeed, in the final rescue deal, the shareholders of Credit Suisse retain around $3 billion of equity value, while the CoCo bond principal write-down amounted to a wipeout of $17 billion for CoCo investors. Implicitly corroborating this commentary, the European Central Bank (ECB), the Bank of England, and other regulators made public statements on the Monday following the Credit Suisse deal that they do not intend to follow the FINMA approach and that they intend to respect the usual priority order of claims in resolution.4 How can these divergent views of regulators be reconciled? Why did the Credit Suisse AT1 CoCo bondholders face losses before shareholders were wiped out? What are the lessons for the effectiveness of post-GFC too-big-to-fail reforms? This article provides clarification of these important questions. CoCo bonds are designed to absorb losses of a distressed going-concern bank at conversion, thereby helping to capitalize the bank. Their primary purpose is to reduce the need for a capital injection by the government in times of crisis when nobody else is willing to provide additional external capital. Such public support is costly to taxpayers and exacerbates moral hazard. CoCo bonds have two main contract features: the loss absorption mechanism and the trigger that activates that mechanism (illustrated in Graph 1).5 CoCos can absorb losses either by converting into common equity or through a principal write-down (partial or full). The trigger can be either mechanical (i.e., defined in terms of a capital ratio) or discretionary (subject to supervisory judgment). The trigger defines the point at which the loss absorption mechanism is activated. The mechanical trigger activates the loss absorption mechanism when the capital of the CoCo-issuing bank drops below a pre-specified fraction of its risk-weighted assets. The bank's equity capital can be measured either based on book value or market value. The discretionary, or point of non-viability (PONV), trigger is activated based on the supervisor's assessment of the bank's possible insolvency. PONV triggers give regulators authority to convert, if and when they decide that the issuer has reached that state. Because the PONV is difficult to determine ex ante, PONV triggers introduce uncertainty about the timing and circumstances leading to the activation of the loss absorption mechanism by the regulator. CoCo bonds typically have more than one trigger. In case of multiple triggers, the loss absorption mechanism can be activated when any trigger is breached. Under Basel III rules, all regulatory capital CoCos are required to have a discretionary PONV trigger. The activation of the discretionary trigger, which was present in all CoCos issued by Credit Suisse, was exactly what allowed FINMA to write down Credit Suisse AT1 capital instruments on March 19, 2023. The loss absorption mechanism is the second contract feature of CoCos. Once the trigger is activated, CoCos can be either converted to equity at a pre-defined conversion rate or subject to a principal write-down. In either case, the conversion delevers the bank and/or boosts its equity capital ratio. For conversion to equity CoCos, the conversion rate can be based either on the market price of the stock at the time of conversion, or on a pre-specified price, like the stock price at the time of issuance. It is also possible to have a combination of market price and prespecified price floor, where the latter defines the floor for the conversion rate and hence protects existing equity holders from unlimited dilution. The various options for setting the conversion price lead to different exposures to dilution risk for existing equity holders, and thus create varying incentives to avoid conversion by existing equity holders. In the case of the principal write-down CoCos, the haircut can be either full or partial. However, most of the principal write-down CoCos of Credit Suisse were full write-down CoCos. The write-down CoCos potentially encourage risk taking by managers acting in the interest of shareholders. The regulatory treatment of CoCos under Basel III and the supplementary requirements of national regulators shape the design choices of CoCo contract features of issuing banks (that can be seen in Graph 2). Under the Basel III framework, CoCos must satisfy two requirements to qualify as regulatory capital. The first requirement, which applies to both AT1 and T2 instruments, is satisfied by the PONV trigger. The second requirement is the going-concern rule, which specifies that the minimum trigger level of CET1/RWA to qualify as AT1 is 5.125%. In addition, AT1 instruments must be perpetual. Importantly, these features are not necessarily outcomes of optimal financial contracting between the issuer and its investors. The regulatory rationale for CoCos is to improve banks’ resilience to financial shocks by strengthening their capital buffers in a crisis, while also providing investors with an investment opportunity that is distinct from debt and equity. By issuing CoCos, banks can raise capital while limiting the dilution costs of current shareholders at issuance and reduce the likelihood of becoming insolvent or requiring a government bailout. In particular, CoCos allow banks to seamlessly recapitalize during times of financial stress. The conversion or write-down of CoCos allows the bank to transfer some of the losses to CoCo investors, ensuring that the costs of bank failures are borne by investors rather than taxpayers. In addition to reducing the cost of distress, the possibility of CoCo conversion provides bankers with incentives to limit the probability of distress. CoCos can be an attractive investment opportunity for long-term investors who understand and are able to take losses in a crisis. CoCos typically offer higher yields than traditional bonds due to their contingent nature, their low priority ranking (on par or even lower than equity investors), and the high systematic component in their risk. Because institutional mandates often block traditional fixed income investors from taking positions in conversion to equity CoCos, the market yield on the instruments may also contain a premium for sophisticated and flexible investors in terms of market segregation. In their 2013 Primer on CoCos published by the Bank for International Settlements, colleagues Stefan Avdjiev, Anastasia Kartasheva, and Bilyana Bogdanova show that the yield-to-maturity of newly issued CoCos are on average 2.8% higher than the subordinated debt, and 4.7% higher than the senior unsecured debt, of the same bank.6 However, the popularity of CoCos could also be partly driven by the search for yield in a low interest rate environment, which have been touted by financial advisors that sometimes misrepresented the product as a relatively safe way of boosting yield. CoCos are often perceived as similar to total loss absorbing capacity (TLAC) instruments, since they are also financial instruments designed to “bail-in” troubled systemically important banks. There are, however, key differences between the two. The primary purpose of CoCos is to delever a bank amid a crisis, by writing down debt or providing equity capital, or both. CoCos are thus designed to maintain the equity cushion of a going concern bank. TLAC, which are usually T2 capital, are additional loss absorption requirements for global systemically important banks (GSIBs) like Credit Suisse to enable a single point of entry resolution. The goal of TLAC is to ensure that the holding companies of systematically important banks have sufficient capacity to absorb losses so that their operating affiliates can continue operating without putting their liabilities at risk. By contrast, CoCo conversion could take place while the bank is still a going concern. A 2020 article in the Journal of Financial Economics we wrote with Stefan Avdjiev and Bilyana Bogdanova provides the first comprehensive analysis of bank CoCo issuance.7 Out of the 731 Coco issues raising over $500 billion between 2009 and 2015, European issues took the largest share (39%), while U.S. was absent from the list. At the time of the Credit Suisse trigger event, the global AT1 CoCos market was estimated to be $254 billion.8 About 56% of these CoCos include a mechanical trigger. Though in the first years of our sample mandatory conversion CoCos were prevalent, principal write-down CoCos have become more popular over time, eventually dominating the market. Finally, slightly more than half (55%) of the CoCos up to 2015 were classified as AT1 capital, while most of the T2 CoCos tend to be issued by banks in emerging economies. Our 2020 Journal of Financial Economics article also shows that the propensity to issue a CoCo is higher for larger and better capitalized banks. Presumably only relatively healthy banks, with remote conversion risk, are able to issue CoCos at a reasonable cost. Another reason is that the principal beneficiaries from a CoCo issue are senior bondholders, whereas shareholders expose themselves to dilution risk. The same JFE article shows that the CDS spreads of CoCo issuers decline upon the announcement of a CoCo issue, indicating that they generate risk-reduction benefits and lower costs of debt. While the average reduction in CDS spread was 2.7 basis points, the drop was more prominent for conversion CoCos (5.0 bps), including those with mechanical triggers (3.3 bps). Conversion CoCos with mechanical triggers are also associated with a reduction of 6.2 bps in CDS spreads. Only Additional Tier 1 instruments contributed to the reduction of CDS. Finally, CoCo issuances have no statistically significant impact on the issuers’ stock prices, except for the case of principal write-down CoCos with high trigger levels, which involve no dilution risk for shareholders and for which stock price responses have been significantly positive on average. Such a contrast suggests a potential moral hazard on shareholders’ part to take excess risk, since the cost will be first borne by the holders of write-down CoCos. CoCos that convert to equity offer a superior design from the point of view of reducing bank fragility. In the case of Credit Suisse, all outstanding CoCos were principal write-down CoCos, and this is the reason why their investors received no equity stake in the merger with UBS. Had they issued conversion to equity CoCos, they would have received shares in the merged company. The collapse of Silicon Valley Bank (SVB) on March 10, 2023 sent shockwaves through the financial system and quickly drew investors’ attention to the prominent weaknesses at Credit Suisse, which was impelled to seek up to CHF 50bn in liquidity support from the Swiss National Bank (SNB) on March 16, 2023. This dramatic move failed to quash speculation, or slow down deposit withdrawals, to the extent that 2 days later the SNB and FINMA announced that they had begun proceedings to organize a takeover of Credit Suisse by UBS. The Swiss financial regulatory authorities had decided that the best way to avert another GFC was to rescue Credit Suisse through a merger with a strong financial institution, following the playbook of the Federal Reserve and US Treasury in 2008 with its rescue of Bear Stearns through a merger with JPMorgan and what has colloquially become known as the “Jamie deal” in reference to the CEO of JPMorgan.9 It is revealing to contrast these two deals, as the contexts are different and the limits on the legal authorities of regulators are different. The Federal Reserve and Treasury did not have nearly the same authority to push through a merger as the Swiss government under the Swiss emergency law. The Federal Reserve had to invoke section 13(3) of the Federal Reserve Act to claim authority to provide liquidity support “under unusual and exigent circumstances” to a broker-dealer. Beyond the authority to provide liquidity support the Federal Reserve (and US Treasury) had no means other than moral suasion to get the management of Bear Stearns and JPMorgan to agree to merge at a proposed price of $2 per Bear Stearns share. They had no authority to sidestep shareholder agreements at both Bear Stearns and JPMorgan, and they could not write down Bear Stearns liabilities outside Chapter 11 bankruptcy. The only way the deal could be structured outside bankruptcy was as a purchase-and-assumption deal whereby JPMorgan agreed to assume all Bear Stearns liabilities. However, even at the price of $2 per share, this was seen as too risky by JPMorgan management and might not receive the blessing of JPMorgan shareholders. To overcome this hurdle the Federal Reserve agreed to back up the deal by setting up an innovative collateralized special purpose vehicle—Maiden Lane LLC. This vehicle would be financed with a junior tranche of $1 billion from JPMorgan and a $29 billion senior tranche of the Federal Reserve, and it would purchase up to $30 billion worth of troubled assets of Bear Stearns, thereby de-risking the Bear Stearns balance sheet. The Federal Reserve and Treasury also had to make concessions to Bear Stearns shareholders by eventually raising the share price to $10.10 Although this deal was in and back some in financial a later a similar merger between and the The Swiss regulatory authorities were in a better to a deal between Credit Suisse and UBS. They could shareholder a resolution of and they did not have to public at risk by setting up a special purpose vehicle to the Credit Suisse balance sheet. they had to do was trigger the write-down of Credit Suisse CoCos that had been designed and issued for a contingent FINMA did that, that government support Credit will trigger a write-down of the value of all AT1 shares of Credit Suisse in the of around and thus an in The principal write-down of these AT1 instruments allowed for a of the Credit Suisse balance sheet. that one of the main of the Bear Stearns and later in the of has been that the of in all these a moral hazard in in this the write-down of the Credit Suisse AT1 bonds would not only the Credit Suisse balance also market that of systemically important financial would be in a crisis. Although the write-down of Credit Suisse CoCos following the rescue of Credit Suisse was it in financial and a crisis in the AT1 bond market. in Credit Suisse AT1 bonds were that their bonds had been written down even Credit Suisse shareholders the first in the CoCo To many as we have this to be an of a and of at the Financial market is to be by a of the of and by the decision to an equity deal at the of bond There had been a of a similar CoCo write-down in when was over by in that case shareholders had been wiped so that was at an that part of the that equity the most junior had been It is not investors who were also financial regulators outside potential in the billion AT1 bond of the quickly on that a resolution in the European we would follow the and we to it to the investors, to avoid to be we have no to respect this the Monday following decision the with the and issued the common equity instruments are the first to absorb and only their full would Additional Tier 1 be required to be written This approach has been in and will continue to the of the and in crisis from and regulatory only to It was only a of a days before of The and quickly announced that a was in the Credit Suisse rescue as “a resolution up as a and on the and responses that has when other regulators and point that in a resolution would have investors like the and of a global in that, this is to can trust any debt issued in or for that if can the are made to be did in the terms ex and the of AT1 most of the CoCos issued by Credit Suisse are principal write-down CoCos with similar For the CoCo issued in on the following based on Credit Suisse ratio. a or to a a the full principal of the will be and written and of the in the for the of and The that will if Credit Suisse common equity 1 by its risk assets as of any balance in the case of of these instruments, other by is below and FINMA has not agreed in writing to of CET1/RWA that a full conversion or as not it is satisfied that circumstances or have or will the of the CET1/RWA to a level that it to be In addition, the following will if either FINMA that it has that a conversion or of the with the conversion or of claims in respect of all other regulatory capital instruments issued by a of the Credit Suisse that, to their terms or by of are of converted into equity or at that time, to improve capital are at the time or an requirement to from becoming or to a part of its as they or from to on its or to improve capital at the time or an of support from the public and in the that or will the of capital and without in the of would have become to a part of its as they due or to on its The of either or both of these two is also to as the of or the The additional Credit Suisse on AT1 bonds “under FINMA has the to proceedings with respect to under Swiss is subject to the resolution under Swiss and if the have not been subject to a could convert the into equity or the in case, in or in be that, in the case of any conversion into FINMA would follow the order of priority under Swiss which other that the would have to be converted to the conversion of any of subordinated debt that not qualify as regulatory capital with a write-down or conversion in the case of any FINMA may not be required to follow any order of which other that the could be in or in part to the of any or all of equity are not to FINMA its authority under these to trigger conversion it that Credit Suisse had reached the The Credit Suisse CoCos were not “gone concern” CoCos concern” CoCos. By these CoCos, FINMA the AT1 as they were to to allow for a recapitalization so that Credit Suisse could be back to a point insolvency. A first has been by and FINMA on that the AT1 bond write-down was and that FINMA did not in the collapse of up on Credit Suisse with both its stock price and its CDS spread Financial an in investors’ perceived probability of a and the announcement of the billion from the SNB did not these Though investors the possibility that could be a on Credit Suisse as in the CDS the below suggests that investors did not a write-down of AT1 bonds on the of the takeover of Credit Suisse It is difficult to what of investors the possibility of a write-down of AT1 bonds even if shareholders were not wiped the of the Credit Suisse CoCo bond issued in in these bonds higher interest than bonds as for the risk of a write-down. higher investors in a low interest rate environment, and their high yields were part of a major like this one in by a Credit Suisse the of CoCo market a yield of around even European bonds in at around so we still value in subordinated financial bonds The average European bank would need to of its capital to investors in AT1 bonds may not have been of the they were that CoCos were as issued by systemically important financial might also be of the that CoCos are junior to equity. This is for the view by the CEO of banks market AT1 bonds as and get with the yields on The surprise of decision can also be seen in the AT1 bond market following the write-down. the below was a in this market in the days following the Credit Suisse in addition to the of the contingent of CoCos. the market has since for the CoCo write-down in was no of CoCo conversion one could from the Credit Suisse CoCos as CoCo conversion or write-down up the balance of a bank in and stabilize financial could only and our analysis in our 2020 Journal of Financial Economics article could at only what investors at the time of issuance. the Credit Suisse only one many lessons can be from this The first is that the way CoCos have been structured is a of some sophisticated investors to have been about the between going-concern and CoCos. often did not that was a and for those who it was not to the The of going concern CoCos is to allow the bank could by a that before equity investors are wiped Another of that to a of uncertainty in the Credit Suisse is the of multiple triggers, an trigger when a capital is and a discretionary trigger that the financial could if it that the issuer had reached the This to and costly It also the risk of to investors. One of the with the discretionary trigger is what the PONV is have been regulators ex and to regulatory The that the and that they had to that they did not intend to from priority to the AT1 bond market is revealing of the extent of regulatory that is in these instruments, which to the and discretionary triggers, and their the in the probability of a CoCo There are no financial that can be to price these contingent with decision to write down Credit Suisse AT1 the by the and and the in the AT1 bond market following the write-down have the market for this important instrument and of capital for banks. It would be a if the of the Credit Suisse were the of CoCos from bank regulatory capital when the Credit Suisse CoCos have their for a and which the of the merger deal with and so Swiss taxpayers to losses from Credit In its decision FINMA also a healthy financial in AT1 bond by investors that their investment the first of risk and that due is before in these and of CoCo is with all the around the Credit Suisse One design that has been in the of of CoCos following the financial crisis that is worth is the CoCo design proposed by one of the present with in our article in The proposed design has main and The more is a CoCo without or discretionary trigger, an for the issuer to convert the claim into equity. Under this the CoCo-issuing bank would in purchase a to issue equity at a pre-specified price, as to the convertible bonds for which the the conversion This is the design for a going-concern It is not a for debt a capital for the issuing bank. It in a of in equity that the issuing bank to raise equity capital at terms in a crisis. In with we that a capital the costs of holding an equity capital for banks by to raise equity capital only when it is at a cost. Because this CoCo design is structured as a convertible bond collateralized for the the optimal conversion point is based on and thus the of the CoCo is an a uncertainty and around the instrument is Another of this instrument is that it provides a to equity capital. The CoCo bond the issuer the to issue capital at terms in a difficult time, often in and thus its equity capital This CoCo design in a of capital with the that the issuer can decide when it is to thus the on regulators to decide when it is to the equity capital under this design the issuer the CoCo into equity when the equity value is thereby recapitalizing the bank and strengthening its balance when it is Finally, the convertible CoCo design the of the in the conversion decision (and all the associated legal as is the case due to the discretionary trigger requirements of AT1 capital instruments under Basel In the of the Credit Suisse CoCo investors have the Swiss regulatory authority for a rescue that to investors’ assets following the Credit Suisse takeover by The collapse of Credit Suisse an important for financial their to up resolution for the the and of of resolution has so the risk of a like Credit Suisse that the Swiss regulatory authorities decided that a purchase and deal with by the SNB was to the Financial at the between the Swiss regulatory authorities and Credit Suisse on March where the SNB the CHF 50bn they also another will merge with and before This is not a on the would have been a for the financial system and the of around the another at the were also a is not for the Swiss we on the we would and one of the of the Swiss Federal in an with the that Credit Suisse have an financial a systemically important bank be up to the to this would be In however, the would be The of Credit Suisse would have other banks into the one this The is that financial regulators must the current approach to the too-big-to-fail problem and resolution. What is the point of TLAC and if when push to regulators a over resolution. One important positive of the Credit Suisse crisis, however, is that it has that $17 billion of CoCos can be written without the system into the This quick and debt write-down has some way in the too-big-to-fail problem and has significantly the cost of Credit Suisse for the Swiss all the too-big-to-fail the Credit Suisse CoCos did their financial on the of contingent capital like CoCos that can be activated to a bank's regulators also need to the of CoCo in terms of their conversion mechanism and their trigger triggers that are in CoCos offer regulators a possibility to in the middle of the crisis. the regulatory it difficult to price the risk of conversion as we in thereby the effectiveness of In we proposed an CoCo providing the issuing bank an to convert into are more and flexible instruments designed to give banks the opportunity to recapitalize during a crisis, and they are more to price the trigger is at the of the and CoCo requirements that enable recapitalization of a troubled bank be the of regulators in and in the and

In this article, the authors examine some effects of economic internationalization on state structures, especially in regard to the distribution of power and authority within federalist systems. Using an institutional rational choice model, they analyze changes in financial regulation and market structures in Germany and the United States. The focus is on the financial realm because of its high degree of internationalization and because, in both countries, financial markets and regulation have historically exhibited federalist traits. The findings indicate that internationalization has led to significant convergence in financial market structures and regulation across the two countries and that in each case this convergence has been accompanied by centralization of financial regulatory authority. Although both the German type of cooperative federalism and the U.S. model of competitive federalism proved to be vulnerable to the growing international pressures, the two countries took different paths of change that reflected differences in domestic institutions. Thus, the authors conclude that convergence is, and will likely remain, of a limited nature.

After the financial crisis in 2007, the high risk brought by financial innovation has aroused widespread concern and thinking again. The measures to curb financial innovation in various countries have become increasingly severe. However, under the background of the supply-side reform proposed by the Chinese government, the reform of the financial capital elements of the supply root is imperative. Therefore, how to curb the risk of innovation in financial institutions effectively, while encouraging innovation in favor of financial supply side of the reform of compliance, become an important issue to be solved. Based on the limited rationality, the long - term dynamic game equilibrium between financial institutions and regulators and its impact on financial system and financial market is analyzed by constructing asymmetric evolutionary dynamic game model. Then, analyzing the relevant factors of long-term equilibrium, and puts forward the regulatory measures which are conducive to encouraging the reform of compliance and the reform of financial supply-side.

Reviewed by: The Unlikely Reformer: Carter Glass and Financial Regulation by Matthew P. Fink Jenny Bourne The Unlikely Reformer: Carter Glass and Financial Regulation. By Matthew P. Fink. (Fairfax, Va.: George Mason University Press, 2019. Pp. xviii, 228. Paper, $32.00, ISBN 978-1-942695-16-5.) Students of American financial history know well the Glass-Steagall Act (1933), which established a regulatory firewall between commercial and investment banking in the wake of the Great Depression. But some may not realize that its major architect—Virginia senator Carter Glass—also helped design the Federal Reserve System (Fed) and the Securities and Exchange Commission (SEC). Matthew P. Fink’s compact, well-written biography of a master politician shows how Glass’s ability to compromise helped him make his mark on American finance. A latter-day Jeffersonian Democrat wary of Wall Street, Glass acknowledged the federal government’s role in maintaining financial stability but also favored decentralization of power. Chapter 1 traces Glass’s views to his modest upbringing in Lynchburg, Virginia, in the aftermath of the Civil War. Chapter 2 describes the turmoil Glass encountered as a newly minted congressman facing the financial crisis of 1907. Upon appointment to the House Banking Committee, “Glass steeped himself on banking issues” (p. 14). Chapter 3 offers a fascinating view of the clashing viewpoints surrounding the creation of the Fed. Fink concludes that “the technical portions” of the Federal Reserve Act of 1913 were attributable to Senator Nelson W. Aldrich, but “[t]he political aspects,” mainly “decentralization and public control,” were due to President Woodrow Wilson and Glass (pp. 54, 55). Glass’s political acumen and financial expertise led to a brief appointment as treasury secretary, which he resigned to take a senatorial seat in 1919. During the 1920s, Glass watched helplessly as the Fed became dominated by big-city banks; he “put forth concrete proposals to slow speculation and buying on margin” (p. 70). The 1929 stock market crash led to Glass’s next major contribution—the Glass-Steagall Act of 1933. Chapters 5 and 6 deftly relate Glass’s ability to compromise—for example, he agreed to include a widely popular provision for deposit insurance in the final bill even though he personally opposed it. As Fink notes, Glass-Steagall chose to fragment power as an alternative to instituting regulatory oversight. Sixty-six years later, Congress reversed course, repealing the key Glass-Steagall separation provision and creating instead a [End Page 507] web of regulatory agencies. Glass’s earlier creation, the Fed, underwent a similar transformation far earlier—counter to Glass’s original vision, the Banking Act of 1935 centralized authority in the Board of Governors rather than dispersing control over regional banks. Glass did win a minor victory in keeping power away from the Fed by pushing for the establishment of a separate agency to oversee the stock market. Although he did not succeed in divorcing the Fed completely from the SEC—the Fed retains margin authority—he did mitigate consolidation of power in governing the financial sector. Fink uses compelling anecdotes, eye-catching illustrations, and pertinent private correspondence to enliven this biography. At the same time, however, he overuses block quotations and heads each chapter with aphorisms that are sometimes spot-on and sometimes head-scratchers. Although the book underplays Glass’s probable motivation for power decentralization—his virulent hatred of African Americans—it does offer a nice account of his contributions to financial reform. Jenny Bourne Carleton College Copyright © 2020 The Southern Historical Association

There has been tremendous pressure on the Obama Administration to justify the actions taken with regards to the U.S. financial crisis which has managed to eliminate, overnight, over a quarter of the middle class wealth and leave one in six adults without a job or underemployed, while generating a bailout debt that was unimaginable in scale and scope only five years ago. In response to this public pressure, in mid-June 2009, the Obama Administration issued a white paper titled “Financial Regulatory Reform - A New Foundation: Rebuilding Financial Supervision and Regulation" (published by the U.S. Department of Treasury) covering a wide range of areas of financial regulation that proposed a new architecture for financial supervision. Although the White Paper touches upon many of the Administration's promised responses to the crisis with regards to new financial regulations and supervisory changes, it has been criticized as being too narrow in the scope and breath needed to manage the sheer size and scale of the impact of the U.S. financial crisis. This paper focuses on ten concerns and issues of note with the Obama Administration's actions and responses to date with regards to the U.S. financial/banking crisis and its 2009 White Paper on “Financial Regulatory Reform." They are as follows: (1) No Discussion and Minimal Attempt by the Administration to Relay Their Understanding of and Global Transmission of This Financial Crisis, (2) Proposed Financial Oversight Council, (3) Increased Powers for the Federal Reserve, (4) Most Recommendations Do Not Follow the Trend Toward Supervision Consolidation, (5) Macroeconomic vs. Microeconomic Supervision, (6) Government in the Financial Markets and Industry, (7) No Significant International Standard Setting or Coordination to Date, (8) Issue of Too Big to Fail Still at Large, (9) Obama Administration's PR Debacle, and (10) Something to Show after Spending $1.4 Trillion Plus.

I The Evolving International Financial Environment.- 1 Global Financial Markets: The Past, The Future, and Public Policy Questions.- 2 The Telecommunications and Information Revolution: Implications for Financial Markets, Trading Systems, and Regulation.- 3 The Financial System and Global Socioeconomic Structural Changes.- II Banking and Financial Intermediary Markets.- 4 Japanese Banking, Financial Markets, and Competitive Equality.- 5 Banking in the United Kingdom and Continental Europe.- 6 Banking and Financial Intermediary Markets in the United States: Where From, Where To?.- 7 Financial Intermediation and Liberalization in Japan.- III Securities Markets.- 8 Internationalization and Regulation of the World's Securities Markets.- 9 Japanese Securities Markets and Global Harmonization.- 10 Reflections on the CFTC/SEC Jurisdictional Dispute.- IV Futures Markets.- 11 Regulation of Futures Markets in the United Kingdom.- 12 The Japanese Financial Futures Market: Present and Future Prospects.- 13 The Internationalization of Futures Markets: Issues for U.S. Markets.- V International Clearance, Settlement, and Payment Procedures: The Role of Regulation.- 14 Automation of the Financial Markets: Implications for Clearance, Settlement, and Payment Procedures.- 15 Twenty-Four Hour Trading, Clearance, and Settlement: The Role of Banks.- 16 Screen-Based Trading in Japanese Financial Markets.- 17 Cooperative Approaches to Reducing Risks in Global Financial Markets.- VI Is There a Systemic Risk Problem in International Financial Markets?.- 18 Systemic Risk in International Securities Markets.- 19 Government Officials as a Source of Systemic Risk in International Financial Markets.- 20 Systemic Risk and International Financial Markets.- VII National Autonomy Versus International Cooperation.- 21 Competition Versus Competitive Equality in International Financial Markets.- 22 Regulatory Harmonization To Achieve Effective International Competition.- 23 Regulating Global Financial Markets: Problems and Solutions.

In Defense of the Dealers: Why the SEC Should Allow Substituted Compliance with the European Union for Security-Based Swap Dealers

The rapid evolution of the digital financial asset market and its growing integration with traditional financial instruments, coupled with its global reach and unrestricted cross-border capital mobility, necessitate a thorough research of these market instruments. Specifically, it calls for an assessment of their potential as alternatives to conventional financial instruments. At the same time, there are many factors contributing to an increased risk of regulatory gaps in the financial market: structural vulnerability of the market of digital financial assets, high volatility of the value of crypto-assets, low transparency, the possibility of a spillover of risks from the market of digital financial assets to other financial markets, as well as the lack of regulatory consensus among financial regulators in the countries of the world. The research objective is to determine the role of investment tokens in today’s financial market, their utility in attracting investment resources on blockchain-based trading platforms, and the nuances of their classification as securities. The article delves into the core concepts and intricacies of regulating securities tokens and analyses quantitative metrics depicting the development of the investment token market and its relative share in the global financial market compared to other financial assets. Notably, the author outlines key criteria for securities regulators to consider when determining whether tokens should be classified as securities. The article reveals the main models of the initial offering of investment tokens, highlights their features, and shows their adaptability to changing conditions within the digital financial asset market and the evolving needs of market participants. It is evident that all current models for raising funds through investment tokens, including IEO, IDO, and STO sub-models, trace their roots back to the Initial Coin Offering (ICO) model and, fundamentally, do not differ significantly from traditional capital-raising models such as Initial Public Offering (IPO) and Secondary Public Offering (SPO) in traditional financial markets. This substantiates the need for global financial regulators to take actions aimed at officially classifying investment tokens as securities. Expanding securities legislation requirements to encompass issuers of investment tokens, particularly concerning information disclosure, promises to mitigate instances of fraud within the digital financial asset market. Such measures would fortify investor protection and reduce the vulnerability of financial markets as a whole.