Despite the Suggestions of Financial Lobbying Groups, the Jurisdictional Basis of the Derivates Bill Is Not Particularly Questionable

Initially I thought this article, Derivatives bill could have international impact, might be interesting, because I’ve sort of been following the international jurisdictional issues that have popped up in the wake of the financial crisis. And that is what it pretends to be about:

Proposed legislation to regulate the $450 trillion privately-traded derivatives markets in the U.S. may allow regulators in the country to extend influence beyond their own borders, by setting capital levels for international banks in their home countries.

But the story is all smoke and no fire. “Extending influence beyond borders” is not, without something more to it, in violation of any principle of international law. So what exactly is the potentially improper legislative act that ‘industry groups’ are complaining about?

Some of the regulatory bills being proposed in the United States, however, have raised concerns among international banks they could allow U.S. regulators to impose capital requirements on European banks that operate in the country, on top of rules planned for the continent.

“The potential extra-territorial effect of this legislation has been an industry concern,” said Paul Forrester, partner at law firm Mayer Brown in Chicago.

International banks and industry groups want terms to be included in the legislation that would exempt overseas banks that are subject to comparable capital requirements in their home jurisdictions from also needing to meet U.S. rules.

So the complaint is, essentially, that “banks that operate overseas and also operate in the U.S. should not have to comply with U.S. rules because they also operate abroad.” Not very compelling stuff. U.S. banks also operate in the U.S. and abroad, and I am not sure if there are any proposals to give U.S.-based banks a break from European derivatives regulations.

There is no international legal objection for the derivatives bill’s planned regulation of foreign corporations that operate in the United States. The existence of prescriptive jurisdiction to regulate foreigners who are located on your territory and doing business is pretty straight forward, and as far as I’m aware, there is no true conflict alleged that would cause any domestic legal problems under Hartford Fire. And as far as policy goes, a regime in which corporations are regulated only by their nationality is not more coherent or desirable than a regime in which corporations are regulated by the laws of the state where they operate. To be overly simplistic about it, the former has a much greater risk of misallocating externalities than does the latter, as if a state’s laws are too restrictive or if they cause to much interference with transnational business operations, business will simply stay elsewhere.


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