Guarding the Guardians: The Case for Regulating State-Owned Financial Entities in Global Finance

Abstract

Amidst the expansion of cross-border financial regulation, conspicuously missing from recent scholarly inquiries is the question of how institutions owned and controlled by governments, such as central banks, international financial institutions, and sovereign wealth funds, should be regulated in their capacities as market participants. The growth of state-owned entities, coupled with the integral role of domestic and supranational regulators in promulgating, monitoring, and enforcing international financial rules, highlights a reversal of roles in the traditional regulatory framework — when governments as regulators become regulated subjects. This Article considers the legal and policy implications of this phenomenon by examining the application of the competing legal doctrines that govern this dynamic: extraterritorial application of domestic regulation versus the privileges and immunities under international law afforded to entities owned by a foreign government or multiple governments. The relative dearth of bright-line rules and the opaque nature of coordination mechanisms provide flexibility to regulators seeking to determine how to treat state-owned entities, but may also undermine the legitimacy of global financial regulation. As a case study, this Article examines the regulation of international financial institutions under the Dodd-Frank Act. To address the functional and normative shortcomings of the international financial architecture, I outline a global governance framework based on international comity to address the unique and wide-ranging implications of governments in the market.

Keywords: extraterritorial regulation, sovereign immunity, privileges and immunities, international financial institutions, international financial regulation, global governance