Public-Private Relations in a Transnational Private Regulatory Regime: ISDA, the State and OTC Derivatives Market Reform

Abstract

It has frequently been claimed that over-the-counter (OTC) derivatives were, by and large, not directly regulated in the largest markets immediately prior to the global financial crisis (GFC). While there is an element of truth in this contention, it betrays the more complex interactions between public legislators and influential transnational private trade associations, most notably the International Swaps and Derivatives Association (ISDA), both prior to the GFC and in the wake of it. ISDA, its members and national governments interact on the basis of legal and policy tradeoffs which are ostensibly related to OTC derivatives’ regulatory treatment but which, in reality, extend beyond this. The fact of these interactions between ISDA and nation states may raise less regulatory legitimacy challenges than some of the norms which are communicated. A prime example is the public transposition of ‘safe harbours’ which insulate OTC derivatives, including ‘purely speculative’ contracts, from the full force of gambling law. It is thus suggested that while the regulatory role and expertise of ISDA should be formally recognised and appropriately harnessed by public actors in the creation of a new public-private regulatory detente in the OTC derivatives markets, a review of the appropriateness of the current legal treatment of purely speculative derivatives should be a priority for any such regulatory regime.