Financial Product Complexity, Moral Hazard, and the Private Law

44 Pages Posted: 24 Jan 2015 Last revised: 2 Aug 2016

See all articles by Heather Hughes

Heather Hughes

American University - Washington College of Law

Date Written: January 22, 2015


Extensive debate surrounds the question of how regulators should respond to the externalization of risk associated with moral hazard in financial markets. The capacity of market actors to externalize risk is related to transactional complexity. Complexity, for example, augments reliance on valuation methods that can obscure risk, aggravating moral hazard. Recently, scholars and policymakers have articulated strategies for regulating transactional complexity that, this Article finds, reflect a shift from a contract law to a property law rubric for understanding financial products. This Article articulates this shift and assesses its regulatory implications. Some call for standardization of financial products. Others call for treating financial products like goods, to be regulated for public safety. But what justifies curtailing freedom of contract? While there are numerous theories of regulation, and of the relationship between law and markets, this Article contends that markets are legally constructed and that the private law doctrines that govern financial transactions present under-explored regulatory possibilities. It considers the extent to which financial products have property — distinguishable from contract — attributes, such that their regulation could fall within the justificatory ambit of property law doctrines that concern liquidity and soundness of markets. The normative implications of a property-oriented view of financial products are under-developed for want of the type of analysis that this Article begins. The problem of moral hazard could become less menacing if lawmakers were to effectively balance complexity and third-party concerns. This Article lays ground for further inquiry into how they might do so.

Keywords: financial regulation, property law, moral hazard

Suggested Citation

Hughes, Heather, Financial Product Complexity, Moral Hazard, and the Private Law (January 22, 2015). 20 Stan. J. L. Bus. & Fin. 179 (2015), American University, WCL Research Paper No. 2015-6, Available at SSRN:

Heather Hughes (Contact Author)

American University - Washington College of Law ( email )

4300 Nebraska Avenue, NW
Washington, DC 20016
United States

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