Who are the agents of financial regulation? Is good (or bad) financial governance merely the work of legislators and regulators? Here Annelise Riles argues that financial governance is made not just through top-down laws and policies but also through the daily use of mundane legal techniques such as collateral by a variety of secondary agents, from legal technicians and retail investors to financiers and academics and even computerized trading programs.
Drawing upon her ten years of ethnographic fieldwork in the Japanese derivatives market, Riles explores the uses of collateral in the financial markets as a regulatory device for stabilizing market transactions. How collateral operates, Riles suggests, is paradigmatic of a class of low-profile, mundane, but indispensable activities and practices that are all too often ignored as we think about how markets should work and be governed. Riles seeks to democratize our understanding of legal techniques, and demonstrate how these day-to-day private actions can be reformed to produce more effective forms of market regulation.
Who are the agents of financial regulation? Is good (or bad) financial governance merely the work of legislators and regulators? Here Annelise Riles argues that financial governance is made not just through top-down laws and policies but also through the daily use of mundane legal techniques such as collateral by a variety of secondary agents, from legal technicians and retail investors to financiers and academics and even computerized trading programs.
Drawing upon her ten years of ethnographic fieldwork in the Japanese derivatives market, Riles explores the uses of collateral in the financial markets as a regulatory device for stabilizing market transactions. How collateral operates, Riles suggests, is paradigmatic of a class of low-profile, mundane, but indispensable activities and practices that are all too often ignored as we think about how markets should work and be governed. Riles seeks to democratize our understanding of legal techniques, and demonstrate how these day-to-day private actions can be reformed to produce more effective forms of market regulation.
Collateral Knowledge: Legal Reasoning in the Global Financial Markets
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Overview
Who are the agents of financial regulation? Is good (or bad) financial governance merely the work of legislators and regulators? Here Annelise Riles argues that financial governance is made not just through top-down laws and policies but also through the daily use of mundane legal techniques such as collateral by a variety of secondary agents, from legal technicians and retail investors to financiers and academics and even computerized trading programs.
Drawing upon her ten years of ethnographic fieldwork in the Japanese derivatives market, Riles explores the uses of collateral in the financial markets as a regulatory device for stabilizing market transactions. How collateral operates, Riles suggests, is paradigmatic of a class of low-profile, mundane, but indispensable activities and practices that are all too often ignored as we think about how markets should work and be governed. Riles seeks to democratize our understanding of legal techniques, and demonstrate how these day-to-day private actions can be reformed to produce more effective forms of market regulation.
Product Details
| ISBN-13: | 9780226719344 |
|---|---|
| Publisher: | University of Chicago Press |
| Publication date: | 04/15/2011 |
| Series: | Chicago Series in Law and Society |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 312 |
| File size: | 763 KB |
About the Author
Annelise Riles is the Jack G. Clarke ’52 Professor of Far Eastern Legal Studies, professor of anthropology, and director of the Clarke Program in East Asian Law and Culture, all at Cornell University.
Read an Excerpt
Collateral Knowledge
Legal Reasoning in the Global Financial MarketsBy ANNELISE RILES
THE UNIVERSITY OF CHICAGO PRESS
Copyright © 2011 The University of ChicagoAll right reserved.
ISBN: 978-0-226-71933-7
Chapter One
What Is Collateral?On Legal Technique
In the late 1990s, a visitor to a Japanese derivatives trading floor encountered a large open room full of metal desks and computer screens. At most of these desks, traders hunched over their computers or shouted into their telephones. As the traders entered into a swap with traders at another bank in New York or London, they scribbled the details of the trade onto a form, then tossed it into a basket at the edge of their desk.
But a few desks to one side were stacked high with documents and large quantities of paper. Periodically, the people working behind the stacks of documents collected the forms in the traders' baskets and returned to their desks. Within eyesight of the traders and the manager of the derivatives team, these "documentation people" "papered the trades," as people said. These workers produced confirmation agreements and then sent them to their counterparts at the other bank.
These confirmation documents adhered to a standard format, such that the documentation person's principal task was simply to complete the form, fax it, receive a similar fax from his or her counterpart at the other bank, and file it away. Occasionally, they would discover discrepancies—misunderstandings between the two parties over the terms, for example—and then would refer these back to the traders to resolve or contact their counterparts at the other bank to rectify the error.
Over-the-counter (OTC) derivative markets are intended to be the most private of financial markets. Unlike futures and options, swaps are not designed to be traded over an organized exchange. The parties to a swap make their own rules, tailor their own contracts, and, above all, privately bear the full risk that one or another will not perform its obligations rather than placing their confidence in the exchange as an intermediary. Since securities regulation law was designed to regulate on-exchange activity, much swap trading has fallen between the regulatory cracks. When disputes arise, therefore, often parties' only formal recourse is to bring a lawsuit in a domestic court under ordinary common or civil law claims such as breach of contract or fraud. Since this is often impractical, the number of formal lawsuits arising out of swap transactions is remarkably low, given the notional amount of the transactions at issue. The effect is that the parties have relatively little recourse to state dispute resolution mechanisms to resolve their internal problems and hence as a practical matter their conduct is relatively unregulated by state-derived norms. And this is precisely the appeal of these markets, from participants' point of view.
When the documentation people were not at work completing and dispatching confirmation forms, they huddled behind piles of binders full of printed forms, dictionaries and pencils in hand, talking on the telephone with colleagues at other banks as they worked through the blanks in the forms. The most common printed form was a "Master Agreement" (International Swaps and Derivatives Association 2002)4 providing the legal framework for all individual swap transactions between any two banks. It defines key practices, rights, and obligations, such as the use of confirmation documents, or the procedures for cashing out obligations in the event of the financial failure of one of the parties.
The form had been produced by representatives of important players in the swap markets, working together under the auspices of the International Swaps and Derivatives Association (ISDA). Founded in 1985, ISDA is a private organization of more than 800 OTC derivatives "dealers"—banks and securities firms that are repeat players ("dealers") in the privately negotiated derivatives industry, the market for derivatives that are not traded through an organized exchange (ISDA 1993; Johnson 2000). The master agreement is one of ISDA's early and lasting achievements and the production of this and other standardized agreements is one of the principal functions of the association (ISDA 1999a, 2).
ISDA's documentation project explicitly seeks to address the particular legal problems emanating from the transnational character of the private derivatives markets such as the ambiguities surrounding choice of law, the differences in national laws governing property rights in collateral, and the complexities of transnational bankruptcy. The ISDA Master Agreement also details a set of global industry practices. For example, the ISDA documents contain a series of "definitions" of key terms, written by a committee of representatives of the world's largest swap dealers. These definitions are presented as the unified understanding of the market as a global whole. This project of elaborating sets of rights and obligations through the terms of standardized contracts aims to serve as a basis for global self-regulation.
The ISDA Master Agreement then represents a classic example of what commentators refer to when they speak of a new Lex Mercatoria (Berger 1999), a "private law governing cross-border transactions" "motivated by a strong desire by its proponents to free international transactions from the perceived shackles of national law" (Goode 2005, 539, 545). ISDA's objective in creating documents such as the Master Agreement and the Credit Support Annex (CSA) document (agreements between swap partners concerning the terms under which they would exchange collateral in the course of their swap transactions) is surely to avoid the regulatory authority of some states, at least, and to create binding obligations among its members that do not rely on a state for their authority or legitimacy. ISDA's actions typify what political scientists have in mind when they define a transnational private regime as "an integrated complex of formal and informal institutions that is a source of governance for an economic issue area as a whole" (Cutler, Haufler, and Porter 1999, 13). As Gunther Teubner observes it,
The focus in law-making is shifting to private regimes, that is, to binding agreements among global players, to private market regulation through multi national enterprises, internal rule-making within international organizations, inter-organizational negotiating systems, and worldwide standardization processes. The dominant sources of law are now to be found at the peripheries of law, at the boundaries with other sectors of world society that are successfully engaging in regional competition with the existing centres of law-making—national parliaments, global legislative institutions and intergovernmental agreements. (2004a, 74)
Such global self-regulation, or global private law as it is known in legal parlance, is now the source of quite a bit of anxiety. Politicians and commentators on the current financial crisis routinely assert that the "unregulated" quality of the derivatives markets (e.g., Bowley 2010; Shiller 2010)—by which they mean unregulated by state law—was a crucial source of the financial crisis.
But if global private law is now often portrayed as largely a bad thing, over the last ten years legal scholars have also seen global private law as a major innovation in the nature of law itself, or at least as a very significant phenomenon in the history of legal development. So-called global private law regimes—private in the sense that they do not rely primarily on the legitimacy or the coercive power of the state for their authority—have fascinated legal theorists for whom the authority, legitimacy, and power of law has long been tethered to the state (Hall and Biersteker 2002). It was once thought that there could be no law without the coercive sanction of the state, and yet such regimes of self-regulation suggest the emergence of a kind of regulatory practice that is nevertheless "beyond the state" (Michaels and Jansen 2006). At the same time, legal theorists have noted that the special character of global private governance renders it particularly difficult for the state to regulate and hence calls for the development of new kinds of regulatory tools (Aman 2004).
But both the defenses and the critiques, both the stories of secrecy and corruption and the stories of innovation and progress, proceed at some distance from the concrete moments, practices, and individuals, like the ones described above, that actually constitute global private governance regimes. More specifically, these arguments for or against global private law stand on a set of anthropological assumptions or claims—assertions about what this private law actually is, from insiders' point of view, about how it is interpreted and experienced "in the real world," and indeed about what motivates the human beings that populate this world—which for the most part go unexamined, untheorized, and undefended empirically. In a nutshell, the pervasive story is this: the derivatives markets are a tribal world of secret customs and close-knit relationships in which actors conspire to develop their own private norms of conduct and to work out their problems among themselves, without appealing to the state, because doing so is in everyone's own best interest. Like all good stories, there is enough truth in this one to stick (Westbrook 2010). But it is also, at the very least, seriously incomplete in ways that have profound implications, both practical and theoretical.
In this chapter, I want to complicate the standard explanation for the authority of global private law that pervades both the utopic and the dystopic accounts—the view that practices of self-regulation work because they enshrine a set of private group norms (Hart 1961; Kelsen 1967). I do so by describing ethnographically one arena of global private law, the production of legal documentation for the global swap markets. This will allow us to see global private law as something very different from a body of norms. Global private law is also, I want to suggest, a routinized but highly compartmentalized set of knowledge practices.
Why does this matter? First, my alternative description of private law beyond the state has implications for the questions of how and to what extent global private law threatens the legitimacy and regulatory capacity of the state. Up to now, it has been taken for granted by most proponents and critics alike that global private law is something analogous to but ultimately very different from state law. That is, it has been assumed that global private law threatens the legitimacy of the state by taking over the functions of the state through other (ostensibly more efficient, more accepted) means. In contrast, I argue that to the extent that global private law poses a threat to the state, it is not because private law is somehow functionally analogous to but qualitatively different from state law. Rather, if one understands private law beyond the state, as I do, as a set of institutions, actors, doctrines, ideas, material documents—of knowledge practices—one begins to see remarkable similarities between the technical workings of global private law and the nature of "state work." Later chapters will explore the nature of legal knowledge inside the state in detail. But here suffice it to say that a better understanding of what is "outside the state" will also help move us toward a better understanding of what is state global regulatory practice, and hence of how private and public can and do work together to address global problems. Let's begin with some background about the particular artifact through which we will embark on this exploration, collateral.
Collateral Practices
One of the principal tasks facing Tokyo bank documentation staff in the 1990s and early 2000s was the completion, execution, and filing of ISDA CSA documents. For reasons related to questions of choice of law (legal questions about what law should apply to the collateral, discussed further below), the CSA initially existed in four versions—a New York law version, two UK law versions, and a Japanese law version. Subsequently ISDA pulled these alternative forms together into one new document, the 2001 ISDA Margin Provisions, which asks parties to choose what law should apply to collateral transactions involving different kinds of collateral (2001).
The core terms of the CSAs resemble those of a standard collateral agreement in each jurisdiction: one party agrees, according to whatever legal theory is prevalent in that jurisdiction, that its obligations will be secured by some form of asset—usually cash or treasury bonds. It further outlines the conditions under which the party receiving the collateral can use it to satisfy the obligation. The CSAs follow the same format as the Master Agreement. The pre-printed form provides a set of basic terms, but allows the parties to customize some aspects of the agreement by filling in the blanks, choosing among given alternatives, and completing a schedule at the end. During the period of my fieldwork (1998–2001), the CSA was widely used in the United States and Europe whenever swap partners exchanged collateral. It was just starting to be used in Japan, however, largely at the urging of foreign counterparties. Exchanging collateral was increasingly a standard part of derivatives trading worldwide.
The most common forms of collateral globally were cash denominated in U.S. dollars and U.S. government bonds (ISDA 2000, 2). Japanese bank employees explained this in two ways. First, American counterparties were more familiar with Treasury bonds and liked to work with what was familiar to them (rather than Japanese government bonds). Second, American counterparties felt relatively confident that rights in "American" forms of collateral such as Treasury bonds were likely to be governed by U.S. law. Japanese banks most commonly posted either U.S. Treasury Bills, Japanese government bonds, or cash denominated in Japanese yen. The standard ISDA credit agreements provided for the daily valuation of each side's portfolio and mandated that either side post additional collateral if the value of its portfolio fell below certain thresholds, or if certain events such as a downgrading of the firm's bond rating occurred. ISDA estimates that at the end of 2006, US$1.335 trillion in collateral was in circulation (fig. 2) and approximately 59% of all privately negotiated derivatives transactions were collateralized (ISDA 2007, 4).
Parties posted collateral by depositing it in computerized book entry accounts maintained by intermediaries who specialized in holding collateral such as Euroclear or Cedel Bank, known as international central securities depositories (ICSDs) (Hval 1997). How much collateral a party was required to post depended on the party's credit rating and the amount of exposure or credit risk at stake in the particular transaction. Because Japanese banks' credit ratings had plummeted in the aftermath of the Asian financial crisis on concerns about these banks' practice of keeping bad loans on the books, posting collateral, on the terms demanded by foreign counterparties, became a precondition to derivatives trading.
Legal Experts
In Japan, this paper regime is managed by an army of "back office" or "documentation" people. Like the vast majority of law graduates, these are generally individuals who have graduated from prestigious law faculties but have either declined to take the bar examination or failed it and hence are not qualified to appear in court. Unlike those who pass the bar exam, these other legal experts—described somewhat disparagingly in the English-language literature as "quasi-lawyers" or "scriveners"—staff the legal office of Japanese companies doing work that, in many other countries, is done by professional lawyers, as well as a mix of other work that might in the United States be done by paralegals in some cases and by company managers in others (Riles and Uchida 2009). In contrast to the more glamorous front office, where well-paid traders revered for their financial genius or their wizard-like intuition about markets work their computer screens and telephones (Miyazaki 2003),14 the back office and its employees existed to supply the legal infrastructure for the trades. Before traders from two banks could enter into a swap, it fell upon the documentation people to fill in the forms.
Although separated by a few meters, the traders and documentation people I knew inhabited different universes. Documentation people, men and a handful of women aged twenty-three to forty-six, were not mathematicians, but legal technicians. They earned less money than others involved in derivatives trading. They worked long hours, with little chance of advancement, since their expertise in legal documentation had little use beyond the back office. And if time is the core disciplining metric of labor in the modern markets (de Goede 2005, 110–14), the labor of the legal expert was disciplined in a very specific way: the plodding work of documentation, with its before-the-fact work of negotiating the terms, and its after-the-fact work of "papering the trades" with confirmation documents, differed entirely from the up-to-the-minute excitement of trading. In other words, these collateral managers and their work were tethered to but ultimately quite collateral to trading, and to the accompanying heroic agency and real-time temporality of the trader. Collateral and collateral managers were documentary and human afterthoughts.
(Continues...)
Excerpted from Collateral Knowledge by ANNELISE RILES Copyright © 2011 by The University of Chicago. Excerpted by permission of THE UNIVERSITY OF CHICAGO PRESS. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
Acknowledgments
Introduction. Private Governance, Global Markets, and the Legal Technologies of Collateral
1. What Is Collateral? On Legal Technique
2. The Technocratic State
3. Unwinding Technocracy
4. Placeholders: Engaging the Hayekian Critique of Financial Regulation
5. Virtual Transparency
Conclusion. From Design to Technique in Global Financial Governance
References
Index