Enforcements in Financial Disputes: A Case for an Interbank Award Clearing Framework

Abstract

Resolving disputes resulting from high speed and fast-moving financial transactions has become an essential requirement for the stability of global financial markets as proven by previous crises. In the 2007 crisis, millions of investors ended with worthless investment agreements. The public did not believe they could pursue claims in state courts and had no faith in the operating regulatory systems. Delays in the enforcement of compensatory awards drained the concept of justice of its meaning. Bankers were bailed out instead of being made to pay for acts of recklessness, information asymmetry and mis-selling. The result was panic and a run on investment banks and the financial crisis ensued. The question is whether an arbitration process that guarantees immediate payment of arbitral awards can accelerate recovery from a crisis and alleviate the burden on state bailouts using taxpayers’ money? Empirical research show that enforceable and swift dispute resolution for financial disputes can establish certainty in the financial markets and assist in deterring imbedded acts of moral hazard within the financial sector. This in turn will impede the main ingredient for financial crises generated within the financial institutions sector and reduce the possibility of recurrences of financial crises such as that of 2007/2008. It is against this background that this thesis is proposing the instant monetizing mechanism of arbitral awards that result from banking disputes. The purpose behind the choice of the financial sector as a pilot for such a proposal is the ready availability of interbank clearing networks. Such networks can play an important role re-injecting funds back into the market through the ease of monetizing the awards and instantly transferring funds to claimant investors. Applying this concept particularly in the financial sector will clear backlogs of investors’ funds that will unfailingly find their way back into the financial markets through the banks. Recycling the funds back into the markets will instantly speed the markets’ recovering cycle and avert deep crises. This thesis acknowledges the role of arbitration in the settlement of financial disputes and the integral role that the enforcement of financial dispute can have in facilitating financial stability in a crisis. It recognises that an arbitration process is as effective as the swiftness by which its awards are enforced. It, as such, argues that a framework that can use existing interbank clearing networks to enforce and clear arbitral awards will efficiently address investors’ disputes. In turn it will help stabilize financial markets by removing uncertainty. The proposed framework will identify possibilities of clearing, trading and discounting arbitral awards while guaranteeing the maintenance of liquidity within the financial markets. Once implemented, the framework will remain innovative as it will operate through already functioning networks using up-to-date clearing technology such as blockchain. As the clearing networks continue to develop in to match the speed by which financial markets progress, the award clearing framework will remain as fast and innovative.