AbstractThe recent financial crises have generated strenuous academic debates on the fundamental premises of market regulation. The interaction between the state and the market is at the core of this discourse. A plethora of postcrisis reforms threaten to undermine the historical monopoly of centralized regulators through more coordinated, “collectivist” approaches to capital market regulation. The dangers of this new collectivism are not fully explored in the current scholarship.
This Article questions the Dodd-Frank coordination mechanisms by demonstrating that crucial benefits may result from the predictability of a linear market-regulator interaction in a cooperative environment. An example of such a successful multiparty interaction is the traditional sector-specific regulatory regime in the clearing and settlement industry.
In clearing, the linear interaction between centralized regulators, such as the SEC, and clearinghouses was associated with market efficiencies, lower regulatory costs, and transaction cost reduction. The relationship was premised on several fundamental postulates, including principles-based regulations, a low frequency of enforcement actions, participatory corporate governance mechanisms that strengthened market self-regulation, a contestable monopoly organization of the industry, and the continuous judicial support of clearing and settlement utilities. To examine these postulates, this Article reviews the history of clearing regulations and forty years of pertinent case law and enforcement actions.
This Article suggests that Dodd-Frank has put forth a questionable approach to reforming — at the very least — successful industries, such as clearing, which were not directly implicated in the crisis. In clearing, Dodd-Frank coordination mechanisms should be invoked rarely, and only in cases where specific inefficiencies in the traditional sector-specific model explicitly undermine its benefits, including regulatory flexibility and cooperation between expert regulators and regulated industries.
SubjectsDodd-Frank Act, Clearinghouses, Coordination, Consolidation, Sector-specific regulation, Clearing and settlement, Systemically important financial market utilities
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