KGB's Legacy: Transplanting Efficient Financial Infrastructures Without Efficiency

127 Pages Posted: 23 Apr 2015 Last revised: 13 Dec 2018

See all articles by Yuliya Guseva

Yuliya Guseva

Rutgers, The State University of New Jersey - Rutgers Law School

Date Written: December 1, 2014


Transplantation of laws from a foreign country is an explicit regulatory choice. It is a choice made by governments and influenced by local and international interest groups. This Article analyzes a complex junction where international legal transplantation encounters destructive transactional and behavioral patterns in countries-recipients. The governments must respond to such inefficiencies and attempt to reduce resulting transaction costs by introducing corrections to a foreign model, i.e., a “domestic gradient.” This research focuses on a very peculiar “gradient”: combining public ownership of financial utilities with close regulatory oversight as a way to mitigate destructive socioeconomic, behavioral and transactional patterns in developing markets.

The Article focuses on a relatively unchartered territory - transplanting of clearing and settlement (C&S) institutions. First, the research analyzes the purposes and development of centralized C&S in the U.S. and Europe. Second, the Article contrasts westernized C&S transplants with their application in the tumultuous economies of Ukraine, Russia, and Kazakhstan.

Third, to assess the transplants, the research builds a theoretical “trust model.” The model suggests that making the national governments active players in a financial industry like C&S, whose sole purpose is minimizing transaction costs and improving capital exchange, does not address the underlying behavioral and regulatory problems that the “gradient” is supposed to remedy. These problems, the Article emphasizes, are a multifaceted lack of trust among private parties, weak reputational constraints, the low observability of conversion from trustworthy to untrustworthy market actors, and an equally potent lack of trust towards government entities in the sample. The Article concludes by hazarding a few policy proposals on how to modify the destructive behavioral and regulatory patterns and thus improve C&S and capital markets. Specifically, instead of transplanting and adjusting foreign law, the governments should resort to institutional transplantation and introduce a neutral umpire: a purely foreign economic party.

Keywords: Capital markets, Trust, Reputation, Transplanting, Clearing, Settlement, Regulatory Reforms, DTCC, DTC, NSCC, Russia, Ukraine, Kazakhstan, EU Capital Markets Directives

JEL Classification: K00, K12, K22, K33

Suggested Citation

Guseva, Yuliya, KGB's Legacy: Transplanting Efficient Financial Infrastructures Without Efficiency (December 1, 2014). 36 U. Pa. J. Int’l L. 525 (2015), Available at SSRN:

Yuliya Guseva (Contact Author)

Rutgers, The State University of New Jersey - Rutgers Law School ( email )

Newark, NJ
United States

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