Innovation and deadlock in global financial governance: transatlantic coordination failure in OTC derivatives regulation

ABSTRACT

The institutional arrangement chosen by the leading nations in order to address financial regulatory reform in the wake of the 2007–2009 crisis exhibits two key features of global economic governance innovation. First, it employs a minilateral approach, restricting the participants that negotiate new regulatory standards to a few, highly involved stakeholders. Second, it relies heavily on government networks that operate on the basis of soft law. The arrangement circumvents the traditional intergovernmental model that has proven overly rigid and ineffective in addressing the problems that arise from highly interconnected and fast-changing global markets. Current theories of global economic governance predict that this twofold innovation enhances the effectiveness of financial regulatory reform. Yet a study of the evolution in over-the-counter (OTC) derivatives regulation shows that this is not the case. The paper then exposes three obstacles to cross-border regulatory cooperation between the two dominant players, the European Union and the United States. Authorities on both sides of the Atlantic are concerned about the distributive consequences of regulation, legislators and legislation hinder cross-border harmonization, and government networks are weak and incomplete. The paper concludes with suggestions of how to overcome coordination failure and theoretical implications for the political economy of networked governance.

KEYWORDS:

• global financial governance
• government networks
• OTC derivatives
• financial regulation
• transnational regulatory networks
• financial regulatory reform

ACKNOWLEDGEMENTS

An earlier version of this paper was presented at the 2014 ISA-FLACSO conference in Buenos Aires. I wish to thank Saori Katada, Nora Rachman, Thomas Stanton, Eric Helleiner, Stefano Pagliari, and three anonymous reviewers for insightful comments.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the author.

Additional information

Notes on contributors

Peter Knaack

Peter Knaack is a recent PhD graduate from the Political Science and International Relations Program at the University of Southern California. His research focuses on global economic governance, financial regulation, and government networks.