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Abstract: This paper is a preliminary draft of a chapter for eventual inclusion in the Handbook of International Economic Law, edited by Andrew T. Guzman and Alan O. Sykes, forthcoming 2006 from Edward Elgar Publishing. The chapter is a survey of the field of international finance from the perspective of law and regulation. Its principal focus is the decision as to what rules to apply in the regulation of banking, securities and sovereign debt - home or host country, or international.
International Finance, regulation, home country, host country
Abstract: In this monograph we address several interrelated themes influencing the corporate governance debate in today's financial marketplace. These include board independence and effectiveness; the role and the independence of the auditor; shareholder rights and activism; and convergence to a global corporate governance system. Our multi-jurisdictional approach sheds light on fundamental differences in existing governance practices globally given differing approaches to the role of the board, audit practices and ownership structure. We argue that no one system of corporate governance is the benchmark for all companies in all jurisdictions and no system of governance is without its own vulnerabilities. We address comparative aspects of corporate governance practices, including those between the US and UK, and observe that within an Anglo American context the UK offers a viable alternative approach to the US regulatory environment through its comply or explain framework, which includes advantages of being less prescriptive and legalistic. We conclude that while voluntary corporate governance standards have important benefits of flexibility over more prescriptive approaches to governance regulation, investors must take responsibility and play an engaged role in making the comply or explain system a credible alternative to a more prescriptive approach to corporate governance regulation. This raises the role of investor governance as a key component of the overall system of corporate governance.
Abstract: This article posits that it would be desirable for issuers in public primary securities markets to be able to issue securities to investors worldwide using one set of optimal distribution procedures and disclosure documents, and one set of liability standards and enforcement remedies. It points out that this state of affairs is currently not possible because the United States conditions public issuance in its territory?and to some significant extent to U.S. investors outside its territory?on compliance with its unique set of distribution procedures, disclosure requirements, and enforcement rules. Harmonization of world rules is not the answer to this problem. There is no reason to assume that the world would choose an optimal level of disclosure, particularly because the United States will push for world rules that are closely equivalent to its own. Moreover, there is substantial doubt as to whether worldwide agreement can be reached on the issue of disclosure, let alone distribution and enforcement rules. Nor is mutual recognition the answer. The approach creates basic inequities for domestic issuers and has not worked well in the European Union, which has the advantage of supranational institutions, despite much fanfare about the single passport. Broader versions of mutual recognition, such as portable reciprocity, founder on problems of enforcement. The article proposes instead the establishment of an offshore free zone. This would require that the United States, like other countries, permit its investors to participate in the offshore market for primary distributions of foreign issuers free of restrictions other than minimum disclosure requirements. One major benefit of this approach is that it would permit the use of common distribution procedures.
Abstract: This article explores whether a more formal bankruptcy procedure, the "Sovereign Debt Restructuring Mechanism" (SDRM) as proposed by the IMF, or in some modified form, is needed to deal with sovereign debt problems. The key consequences of the invocation of such a procedure would be a standstill on creditors' collections of principal and interest, a stay on creditors' attachments or foreclosures on assets, and new money priority for any funds lent to a sovereign during the duration of the procedure. Negotiations would ensue between the sovereign and the creditors over the terms of restructuring, with super-majority voting on acceptance of any restructuring plan. Once accepted, creditors could not holdout by asking courts to enforce the original terms of their debt instruments. The article also explores whether more widespread use of collective action clauses (CACs) in sovereign bonds would be an alternative to SDRM. The article proposes that credible restraints be placed on IMF and official lending since without such constraints sovereigns will not have sufficient incentives to restructure. It further proposes that the G-7 efforts to encourage CACs be abandoned since they will not be adopted and cannot solve the restructuring problem. It then recommends a modified SDRM that is more creditor friendly. The modifications would require: (1) the development of a benchmark on debt valuation to insure creditors receive fair value in a reorganization; (2) the inclusion of all debt, except secured debt, in the process - specifically multilateral, official and domestic debt - to eliminate debt discrimination; (3) the use of cramdown; and (4) minimization of the role of the IMF.
sovereign debt, IMF, bankruptcy, international finance, banking, emerging markets
Abstract: The U.S. system of dividing regulatory authority between the states and the federal government takes on a very different cast for three important financial firms, banking, securities and insurance. According to the Federal Reserve, at the end of 2005, total assets held by these three types of firms were $11.82 trillion, $10.5 trillion and $5.6 trillion, respectively. In banking, federal regulatory power preempts state authority over nationally chartered banks, while state power is primary for state-chartered banks, subject to significant federal constraints on risk. In insurance, state regulatory power preempts federal authority (reverse preemption) for all insurance firms. In between these federalist poles are securities offerings and securities firms that are concurrently subject to state and federal regulation. However, there has been a recent trend of increasing federal preemption in the securities field. It seems odd that we have three different approaches to preemption for three different activities that are increasingly offered in integrated financial service firms. This paper advocates that insurance adopt the dual chartering approach of banking, with complete federal preemption for nationally chartered insurance firms, and that federal preemption be further extended for securities offerings and firms.
preemption, insurance, banking, securities, state regulation
Abstract: One of the factors widely believed to have contributed to the Asian financial crisis was the dependence of the region on external short-term dollar-based financing from banks. The Asian Bond Markets Initiative (ABMI) which was launched in Manila in 2003, aims to solve this problem by developing efficient and liquid government and corporate bond markets in Asia. There are two fundamental ways for a group of countries to create an integrated bond market - onshore and offshore. Onshore integration requires that each participating country permit its issuers to raise capital by issuing bonds in foreign countries to foreign investors and to permit its investors to invest in foreign securities in their own countries. In addition, for regional issuance to be efficient, so that issuance in all countries could take place under the same rules, all countries participating in the arrangement would have to have similar securities laws and regulations, or allow a foreign issuer to issue in their markets under its home-country rules. This paper argues that offshore integration provides a better model. Countries must permit their issuers (government or corporate) to raise funds offshore from domestic and foreign investors in participating countries. In addition, participating countries must permit its investors to invest in offshore securities. The offshore model does not require harmonization or deference to the use of home country rules in host countries. Harmonization, and the resulting efficiency, is achieved by issuers and investors operating under the rules of the offshore center.
bonds, integration, offshore, Asia
Abstract: This paper examines the design of a federal regulatory structure for insurance companies in the United States, assuming some form of an optional federal charter is adopted. Any design must take account of the objectives of insurance regulation, the convergence of financial service powers among banks, securities, and insurance firms, the types of lines to be regulated at the federal level, and problems posed by the possible participation of nationally chartered insurers in state residual pools and guaranty funds. This paper argues that the creation of a new federal insurance regulator should be accompanied by more consolidation and less fragmentation in the overall federal regulatory structure, by placing the new regulator within an operationally strengthened President's Working Group on Financial Markets. Ideally, a new optional federal charter should provide a real federal option by having the federal government fully regulate the safety and soundness and product lines of all insurers choosing the federal option. However, if lines were to be split between federal and state regulation, safety and soundness regulation of all insurance companies choosing a federal option should take place exclusively at the federal level, leaving the states with responsibility for consumer protection regulation in non-federal lines. While state guaranty funds have functioned effectively overall, a national guaranty fund would have the advantage of uniting responsibility for insurance and safety and soundness regulation, as in the case of banking.
insurance reform, regulation, optional federal chartering
Abstract: The U.S. insurance industry is primarily regulated by the states. This is in contrast to the regulatory structure for other financial intermediaries which have a federal regulator. Banks, for example, may choose to be regulated by either the federal government or by the states. Recent legislation proposes to provide a similar optional federal chartering (OFC) system for insurers. Given the proposed legislation we make two contributions to the discussion. First, we examine the case for optional federal charters focusing on the costs and benefits of regulation at the federal versus the state level and conclude that and optional federal chartering system dominates the status quo. Second, we add to the discussion by describing what additional issues need to be addressed if we adopt an insurance OFC system. While the merits of OFC have been much debated, comparatively little consideration has been given to the matter of how such a system should function if enacted.
insurance regulation, federalism, optional federal charter
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