Boilerplate Shock: Sovereign Debt Contracts as Incubators of Systemic Risk
Gregory H. Shill
New York University School of Law
September 10, 2014
89 Tulane Law Review __ (2015, Forthcoming)
U Denver Legal Studies Research Paper No. 14-16
Scholars generally assess the usefulness of standard-form commercial contracts from the standpoint of the firms that use them. But these firm-centric accounts overlook the cumulative impact of standardization on a given market. Where the market in question is critical to the financial system, this oversight can be quite dangerous.
This article examines the coordinated use of two standard contract terms in European sovereign bonds, a market that many observers considered the greatest source of global economic instability in the five years following the 2007-09 financial crisis. These terms require that the bonds be paid in euro and that any dispute be resolved under foreign law. According to the existing scholarly consensus, these terms are benign, but a closer look reveals this view to be dangerously inaccurate. This conclusion has powerful implications not only for the multitrillion-dollar sovereign lending market, but for the future of securities contracts and financial regulation more generally.
Specifically, tenuous assumptions about the boilerplate terms that govern these debts reveal a perilous gap in financial regulation: when standard terms in private contracts become ubiquitous, they have the potential to inflict severe and unexpected harm on the broader financial system. Currently, the law lacks even a vocabulary to describe this dangerous externality, let alone a mechanism to manage it. By proposing a new rule that would address the problem of what might be called “boilerplate shock” in the Eurozone, the article argues for expanding the focus of financial regulation to encompass the potential of private contracts to become incubators of systemic risk.
Number of Pages in PDF File: 75
Keywords: sovereign debt, financial regulation, systemic risk, securities regulation, monetary law, commercial law, contract design, boilerplate, bond, conflict of laws, eurozone, private international law, sovereign default, euro, European Union, EMU, lex monetae, ISDA, derivative, law of money, currency
JEL Classification: K00, K22, K23, K33, K41, E42, E44, E52, E58, E62, F02, F33, F34, F42Accepted Paper Series
Date posted: March 3, 2014 ; Last revised: September 11, 2014
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