Governance of Global Financial Markets: Institutional and Ethical Aspects

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In the past decade an amorphous, quasi-formal, and polycentric system of governance for international financial markets has emerged. This consists of a web of public, quasi-public, and private international bodies, and thousands of quasi-binding standards and rules. These rules are addressed in a semi-mandatory form to the international financial community and, in practice, their application is not subject to any jurisdictional constraints. The most central parts of this governance system comprise international regulatory regimes based on 'soft law', which are imposed by regulatory networks such as the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions (IOSCO). In addition, private institutions with quasi-regulatory responsibilities, such as the International Credit Rating Agencies, play an important role in the emerging global system of governance for international financial markets. The current model of regulation for global financial markets is especially ineffective when it comes to: (1) coordinating appropriate responses to global regulatory challenges, such as, for instance, the regulation of the emerging mega- exchanges, (2) the containment of international financial crises(3) the identification of the appropriate framework for the operation of the global investment fund industry. These weaknesses are, in part, due to the fact that the institutional arrangements underlying the governance and regulation of global financial markets are subject to a maze of conflicting political and economic interests and, in part, to the messy state of current institutional arrangements. Equally important is the fact that the current governance system has emerged almost by default and is the product of circumstance. As a result, it is mostly responsive rather than proactive intending to address the pressing issues of international monetary crises and of banking collapses that pose risks to systemic stability in a transnational context. Thus, it has failed to address important questions about the desired role of global finance. This study strives to address some of these inadequacies and suggest workable solutions. It argues for the establishment of a formal institutional framework dealing with global financial markets. This would be largely derived from an amalgamation of the current semi-formal structures into a global functionary with rule-making powers. The operation of this framework would largely be based on the (familiar from EU law) principles of minimum harmonization and mutual recognition giving the benefit of a global common passport to firms, institutions, and markets complying with the agreed global regulatory standards. Furthermore, the study examines the international consensus that underpins the operation of global financial markets through the lens of social contract theory. Thus, support is lent to the argument which views this consensus as an implicit global regulatory contract. The policy objectives that should be included in this contract constitute the normative foundations of an international governance framework for global financial markets. In this context, it is argued that the relevant governance framework should encompass two sets of policy objectives: (a) the primary goals of depositor/investor protection and protection of systemic stability and of market integrity and (b) the secondary goals of economic development and poverty eradication in very poor countries. The pursuit of the second set of objectives would always be subordinate to fulfiling the principal objectives and would be facilitated by a properly devised system of regulatory incentives embedded in in international capital adequacy regulation and global investment fund licensing schemes.