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International Law in Financial Regulation and The twenty-two articles in International Law in
Monetary Affairs. Edited by Thomas Cottier,
John H. Jackson, and Rosa M. Lastra. Oxford,
New York: Oxford University Press, 2012. Pp.
xiv, 455. Index. $105, £60, cloth.
Serious academic efforts to reconsider the legit-
imacy and integrity of international financial sys-
tems followed in the wake of the 1997–98 Asian
financial crisis, which originated in developing
economies but threatened global financial stabil-
ity. Scholars and practitioners identified a host of
structural problems in the international financial
markets that hampered rational and efficient oper-
ations, and offered a variety of reform proposals—
albeit mostly from a strictly economics perspec-
Fn tive.1 Only a few legal studies tackled the
fundamental issues of the international financial
system, such as externality problems of regulatory
discrepancy, systemic gaps between domestic reg-
ulations and international markets, and, most
importantly, the lack of effective multilateral trea-
Fn ties.2 And in 2007– 09, before any significant
reform measures were incorporated into the inter-
national financial system, the world economy
experienced an even greater crisis; the structural
problems of international financial markets, the
result of weak regulatory frameworks, were made
well apparent. The question confronting the
world economy is no longer whether the interna-
tional financial system demands “hard” law;
instead we need to determine how international
economic law can be brought to bear on increas-
ingly fluid financial and monetary affairs.
1
For example, the notable works by the Group of
Thirty composed of senior representatives of the private
and public sectors as well as academia are available
online at http://www.group30.org/publications.shtml.
See also United Nations, Report of the Commission of
Experts of the President of the United Nations General
Assembly on Reforms of the International Monetary
and Financial System (2009) (“Stiglitz Commission
Report”) available online at http://www.un.org/ga/
econcrisissummit/docs/FinalReport_CoE.pdf .
2
See, e.g., THE REGULATION OF INTERNATIONAL
FINANCIAL MARKETS: PERSPECTIVES FOR REFORM
(Rainer Grote & Thilo Marauhn eds., 2006); GLOBAL
GOVERNANCE OF FINANCIAL SYSTEMS: THE INTER-
NATIONAL REGULATION OF SYSTEMIC RISK (Kern
Alexander, Rahul Dhumale & John Eatwell eds., 2006).
Electronic copy available at: http://ssrn.com/abstract=2395740
Financial Regulation and Monetary Affairs were
originally published in the September 2010 spe-
cial issue of the Journal of International Economic
Law. Both the special issue and this book were
edited by Thomas Cottier of the University of
Bern, John Jackson of the Georgetown University
Law Center, and Rosa Lastra of the Centre for
Commercial Law Studies (CCLS), Queen Mary,
University of London.
In 1998, writing the lead article of that journal’s
inaugural issue, John H. Jackson as editor-in-chief
envisioned “a very high probability that the inter-
national community will turn toward the forma-
tion and designing of a treaty-based multilateral
institution which could enable it appropriately
and efficiently to respond to the problems of such
regulation,” and he presented a series of legal issues
that needed to be considered when designing
international institutions.3 Many of those same Fn
issues are addressed in the essays presented in the
book under review, with leading legal scholars
presenting comprehensive prescriptions and poli-
cies for strengthening the international financial
system.
The book comprises five parts. As background
for the analyses presented in parts II to V, part I
analyzes the nature and causes of the 2007– 09
financial crisis. Part II probes architecture of, and
conceptual issues relating to, the international
financial system, ranging from systemic differ-
ences between the international law of trade and
finance, to the peculiar historical development of
the international monetary system, and to the
growing predominance of soft law for interna-
tional finance. In addition to proposing key prin-
ciples for a new architecture in order to enhance
financial stability, the “Santiago Principles” for
sovereign wealth funds4 are discussed as a current Fn
example of international financial standard-set-
ting processes. Part III delves into more specific
issues to be tackled in developing and applying
3
John H. Jackson, Global Economics and Interna-
tional Economic Law, 1 J. INT’L ECON L. 1, 21–23
(1998).
4
International Working Group of Sovereign Wealth
Funds, Generally Accepted Principles and Practices–
Santiago Principles, at http://www.iwg-swf.org/pubs/
gapplist.htm.
1
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2 THE AMERICAN JOURNAL OF INTERNATIONAL LAW
international law for international financial mar-
kets. Problems relating to multilayered gover-
nance, borders, transparency, and regulatory com-
petition and subsidiarity are scrutinized, as is
international financial law’s potential contribu-
tion to addressing situations in which governmen-
tal regulation has altogether failed, including pro-
posals involving organizational design. The
principles and directions for capital and securities
regulation reforms are also presented. Part IV
explores the implications of global trade rules such
as the nondiscrimination obligation, prudential
standards, World Trade Organization (W TO)
disciplines on subsidies and services. Also
addressed are the interconnections among compe-
tition, state aid policies, and financial taxes in
international financial law. Part V deals with the
potential role of international law in monetary
affairs, the need for international surveillance of
monetary policies, and the regulatory authority of
the International Monetary Fund (IMF). Part VI
presents an insightful concluding chapter by Cot-
tier and Lastra—a critical addition in view of the
decision to publish the original special issue as
a book.
As R. Michael Gadbaw explains in his essay,
“Systemic Regulation of Global Trade and
Finance: A Tale of Two Systems,” the legal frame-
works regulating global trade and global finance—
the two central pillars of international economic
law—are strikingly different despite their com-
mon origin in the Bretton Woods system. Modern
international trade law originated with the Gen-
eral Agreement on Tariffs and Trade, compro-
mised by all its inherent weaknesses, or “birth
defects.” But trade law then significantly matured
with the establishment of the W TO, including
the enforcement of WTO Agreements through an
effective dispute settlement system. By contrast,
modern international financial law arose origi-
nated in the fulcrum defined by the IMF and the
World Bank, but its rigorous legal rules based on
the gold standard and fixed exchange rates have
given way to a corpus of soft law comprising best
practices, regulatory reports, and memorandums
of understanding, with two of the primary goals
being greater information sharing and coopera-
Electronic copy available at: http://ssrn.com/abstract=2395740
[Vol. 108
tion, all to generate better compliance. As Gadbaw
notes:
The W TO became a member-driven, rule-
oriented, unitary, comprehensive and nearly
universal system where the obligations run
horizontally from members to other mem-
bers, decisions are made by consensus, and
obligations are interpreted and enforced
through a dispute settlement system with a
highly developed judicial function having
the power to determine violations and autho-
rize sanctions. The international financial
regulatory system became a fragmented,
complex, multi-tiered, multi-dimensional,
resource-oriented system that accommo-
dates the different domains and regulatory
prerogatives of finance officials, central
bankers, and bank regulators as well as the
private financial community by creating a
variety of different organizations from trea-
ty-based to intergovernmental to cooperative
arrangements among functional regulators.
(pp. 41– 42) (footnote omitted)
The asymmetrical evolution, systemic defi-
ciency, and instability of international finance and
trade law were much in evidence during the
2007– 09 global financial crisis. In this context,
Andreas F. Lowenfeld reviews the institutional
evolution and dwindling roles of the IMF, effec-
tively highlighting the systemic limitations of cur-
rent regulatory structures. Lowenfeld thus
answers, in part, a question raised by Gadbaw
(which can also be understood as the central ques-
tion in the entire volume)—namely, whether
“greater convergence” is needed “in the global reg-
ulatory regimes governing trade and finance” (p.
51). Chris Brummer examines the reason for pre-
dominance of “soft law” in international financial
systems and calls for “more robust monitoring of
regulatory rules” and “institutional innovations”
to enhance legitimacy (p. 112). In practice, con-
ventional recourse to soft law in financial markets
has resulted from the mismatch between the trea-
ty-based powers exercised by governmental
administrative bodies and the much stronger pow-
ers of domestic financial and banking organiza-
tions that are in charge of financial affairs— orga-
nizations that are typically protected from
governmental interference in order to ensure their
political neutrality and independence in making
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2014] RECENT BOOKS ON INTERNATIONAL LAW
financial policy decisions. This situation seems to
require more serious academic efforts from both
the international and domestic/constitutional law
perspectives.
As a theoretical foundation for developing
international law applicable to financial systems,
Rolf Weber posits a global coherence in which
multilayered governance is used to maintain
financial stability, and in which the trust and
integrity of financial markets and actors play a cen-
tral role. He suggests that “the allocation of regu-
latory responsibilities to the different layers of gov-
ernance should be based on the (geographic) scope
of the underlying financial activities and the
importance of the regulatory objectives by refer-
ence to the common core values” (p.170). Joseph
Norton presents the Santiago Principles for sover-
eign wealth funds—a set of twenty-four principles
and practices addressing, inter alia, legal and insti-
tutional governance, accountability arrange-
ments, investment policies, and risk manage-
ment—which he sees as the product of an ”initially
unplanned and largely disjointed pattern of incip-
ient ‘multi-level global governance’ among major
national and regional actors” (p. 126).
Luis Garicano and Rosa Lastra elaborate seven
regulatory principles that should be considered as
principles of multilevel governance. Among other
things, they support the following: further inte-
gration in the supervision of banking, securities,
and insurance; systemic supervision under the
purview of the central bank; limited reliance of the
macro-supervisor (that is, the overarching regula-
tory authority) on self-regulation; and hierarchical
structure of international supervision. Christine
Kaufmann and Rolf Weber suggest a three-di-
mensional, rule-based approach to transparency
in financial regulation. As a precondition for
building confidence, they separate the notion of
transparency into three parts: the constitutional
dimension, which defines procedures and institu-
tions for regulating financial markets; the substan-
tive dimension, which establishes the values and
objectives of financial regulations; and the
accountability dimension, which is an essential
element for rebuilding confidence in the financial
system.
3
But other factors also come into play. Because of
the intrinsically transnational character of finan-
cial products and markets, the main purpose of
coordinating international financial regulation is
not necessarily to “level the playing field” or to
promote equal competition. Christian Tietje and
Matthias Lehmann emphasize that an interna-
tionally harmonized financial system may poten-
tially undermine the efficiency of financial mar-
kets and increase the probability of a global crisis.
The crucial task of international financial law is
therefore to find the “right balance” (p. 149)
between global harmonization and regulatory
competition. Joel Trachtman explains why inter-
national financial stability is a public good and
why it is so important for international financial
law to overcome externality problems. He argues
that globalization, technological advance, finan-
cial innovation, and economic growth inevitably
increase the need for stronger international finan-
cial law. Steve Charnovitz addresses how interna-
tional financial law could address the failure of
governmental regulation, and concludes that
international financial law needs to be responsive
to the problems not only of market failure but also
of government failure.
On the more practical level, Hal Scott focuses a
central problem underlying the global financial
crisis—namely, the systemic risk inherent in inad-
equate or failed capital regulation. With respect to
limits on leverage—in particular, the Basel meth-
odology—Scott discusses the weaknesses of the
reform plans prepared by the Committee on Cap-
ital Markets Regulation in May 20095 and argues Fn
for more use of market discipline in calibrating
and regulating capital requirements. Although
securities markets may not play a fundamental
causal role in financial crises, they typically work as
a mechanism for spreading the contagion of finan-
cial shocks and crises. That said, Donald Lange-
voort argues that focusing on the existing institu-
tional aspects of securities regulation would
enhance international cooperation and regulatory
convergence.
5
The Global Financial Crisis: A Plan for Regulatory
Reform (2009), at http://capmktsreg.org/2009/05/the-
global-financial-crisis-a-plan-for-regulatory-reform/.
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4 THE AMERICAN JOURNAL OF INTERNATIONAL LAW
Other areas of international economic law—
especially in relation to trade, competition, and
taxation— highlight elements of international
financial law and the ways in which it has devel-
oped. Cottier and Markus Krajewski argue that
the cornerstone principle of nondiscrimination in
W TO law is absent in the international financial
system due to the different legal relationships and
different functions embodied in the financial and
trading systems. Unlike the W TO system, the
international financial system employs a more
diverse and less legalistic set of rules, and aims to
secure financial stability instead of market liberal-
ization. They suggest that global minimal pruden-
tial standards should be adopted and then applied
in a nondiscriminatory manner to international
financial institutions. They also make an intrigu-
ing proposal based on the Reference Paper on
Fn Telecommunications,6 which incorporates addi-
tional commitments into the W TO’s General
Agreement on Trade in Services (GATS). In par-
ticular, they suggest using the same approach to
incorporate supplementary rules and policies for
competition and regulation— especially pruden-
tial standards—into the W TO’s legal framework
for financial services under GATS. This approach
has the advantage of being more flexible, less cum-
bersome, and easier to implement and enforce.
Panagiotis Delimatsis and Pierre Sauvé argue,
however, that the recent financial crisis would
likely to hinder effort to negotiate market liberal-
ization in financial services, especially at the W TO
(as opposed to preferential trade agreements).
They also argue that the financial crisis and subse-
quent policy responses of many developed coun-
tries increased the likelihood that the scope and
application of international trade and investment
standards will be determined through binding dis-
Fn pute settlement, if even then;7 the massive post-
crisis subsidies to the financial services industry are
6
World Trade Organization, Negotiating Group on
Telecommunications, Telecommunications Services:
Reference Paper (Apr. 24, 1996), at http://www.wto.org/
english/tratop_e/serv_e/telecom_e/tel23_e.htm.
7
The interface between financial market develop-
ments and the GATS has drawn more academic atten-
tion in recent years. See, e.g., Panagiotis Delimatsis,
Transparent Financial Innovation in a Post-crisis Envi-
ronment, 16 J. INT’L ECON L. 159 (2013).
[Vol. 108
still largely unchallenged under the GATS. In this
context, Gary Horlick and Peggy Clarke discuss
the limitations of the current W TO subsidy dis-
ciplines to address government intervention in
financial markets. They support the use of non-ac-
tionable services subsidies—for example, in rela-
tion logistics services, capital markets, and com-
munication services—to advance the economic
development of the least developed countries,
though persuading W TO members to agree may
present a difficult challenge. Kern Alexander
argues that financial taxes should become an inte-
gral component of prudential regulatory regimes
and should be used, when necessary, to pay for the
social costs of financial crises.
The termination of the gold standard and fixed
exchange rates left room for legal (and governmen-
tal) interventions on monetary issues such as the
money supply, interest rates, and exchange rates.
Ernst Baltensperger and Cottier examine the role
of international law in monetary affairs from the
perspective that the global monetary system is a
product of globally competing monetary monop-
olies and sovereign rights. They argue that nondis-
crimination and conditional most-favored-nation
treatment should be incorporated into policymak-
ing and the future architecture of the international
monetary system. Gary Hufbauer and Daniel
Danxia Xie suggest that the monetary framework
be expanded to take explicit account of financial
stability as a policy objective for central banks.
What to do now? Echoing Einstein’s words that
“[w]e can’t solve problems by using the same kind
of thinking we used when we created them,” Cot-
tier and Lastra argue in their concluding chapter
for a “bolder approach” (p. 421) to rectify the cur-
rent soft law– based international financial system.
If they are correct, then future efforts should focus
more directly on the design of an institutional
framework that can embrace the legal insights
presented in International Law in Financial Regu-
lation and Monetary Affairs. The Bretton Woods
system, originally perceived as a trinity of institu-
tions—the IMF, International Bank for Recon-
struction and Development, and International
Trade Organization— could barely survive the
demise of the ITO, even with the resulting expan-
sion of the General Agreement on Tariffs and
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2014] RECENT BOOKS ON INTERNATIONAL LAW 5

Trade. Although the W TO significantly im-
proved the scope and role of international trade
law, the post–Bretton Woods system of the twen-
ty-first century may need a more coherent and
newly augmented trinity of the W TO, World
Bank, and potentially a World Financial Organi-
zation that would provide a “rule-oriented” sys-
tem, modeled on the W TO, to supplant the IMF.
If such an effort were undertaken, the scholarly
contributions of the book under review would
prove invaluable.
The 2007– 09 financial crisis spawned a large
body of work (as listed in the book’s bibliography)
that explores the theoretical underpinnings of, and
possible institutional reforms of, the international
financial system. The essays in International Law
in Financial Regulation and Monetary Affairs not
only build upon that scholarship but present sig-
nificant new analyses and proposals that deserve
careful attention by scholars and financial regula-
tors alike.
DUKGEUN AHN
Seoul National University