Market formation and governance in international financial markets: The case of OTC derivatives

Morgan, Glenn (2008) Market formation and governance in international financial markets: The case of OTC derivatives. Human Relations, Vol.61 (No.5). pp. 637-660. ISSN 0018-7267

[img]PDF - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
182Kb

Official URL: http://dx.doi.org/10.1177/0018726708091766

Abstract

How are markets developed and governed? The article reviews four perspectives on the formation and development of markets and market governance — the political perspective (Fligstein), the network perspective (White), the framing perspective (Callon) and the soft law/expert power perspective (Slaughter). It then utilizes these perspectives in order to understand the development of the market for over-the-counter (OTC) derivatives. It finds that this market was stabilized and governed through the operation of all of these features — power, networks, framing and expert power. The International Swaps and Dealers Association (ISDA) to which all market participants belong has played a central role in this process. It has created a Master Agreement that is the common basis to all OTC derivative contracts across the world and seeks to overcome potentially problematic areas such as netting and collateral. It brings together all market participants and uses their expertise within its committees to develop new rules. However, the article shows that ISDA as a private international association cannot sustain governance by itself. It has to influence national governments in order to ensure that its Master Agreement is enforceable even though the agreement favours ISDA members above other actors. This has the potential for political controversy though mainly governments deal with it as an issue of technical expertise. At the public, international level, the central bankers forum in Basle is also concerned with the oversight of the sector and have issued a number of warnings about potential sources of instability arising from the derivatives market. The article illustrates that the market formation process is highly complex and that the governance of the market is multi-levelled and precarious. The research raises questions about how other complex markets are being created and how their governance structures are determined.

Item Type:Journal Article
Subjects:H Social Sciences > HG Finance
Divisions:Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH):International Swaps and Derivatives Association, Derivative securities, Captial market, Security (Law), Corporate governance
Journal or Publication Title:Human Relations
Publisher:Sage Publications Ltd.
ISSN:0018-7267
Date:May 2008
Volume:Vol.61
Number:No.5
Page Range:pp. 637-660
Status:Peer Reviewed
Access rights to Published version:Open Access
References:Abbott, K.W. and Snidal, D. (2000) Hard and Soft Law in International Governance International Governance 54,3, 421-456. Bank for International Settlements (1994) Macroeconomic and Monetary Policy Issues Raised by the Growth of Derivatives Markets (The Hannoun Report) Basle: BIS. Bank for International Settlements (1998) OTC Derivatives: Settlement Procedures and Counterparty Risk Management Basle: BIS. Bank for International Settlements (2007) New Developments in Clearing and Settlement Arrangements for OTC Derivatives Basle: BIS. Brunsson, N., Jacobbson, B. and Associates (2000) A World of Standards Oxford: Oxford University Press. Buenza, D., Hardie, I, MacKenzie, D. (2006) A Price is a Social Things: Towards a Material Sociology of Arbitrage Organization Studies 27,5, 721-745 Burt, R. (1992) Structural Holes Cambridge, Mass: Harvard University Press. Callon, M. ed. (1998) The Laws of the Market Oxford: Blackwell and Sociological Review Press. Callon, M. and Muniesa, F. (2005) Economic Markets as Calculative Collective Devices Organization Studies 26,8, 1229-1250 Carruthers, B. and Halliday, T. (1998) Rescuing Business: The Making of Corporate Bankruptcy Law in England and the United States, Oxford: Oxford University Press. Dezalay, Y. and Garth, B. eds. (2002) Global Prescriptions: The Production, Exportation and Importation of a New Legal Orthodoxy. Arbor: University of Michigan Press. Djelic, M-L. and Sahlin-Andersson, K. eds. (2006) Transnational Governance: Institutional Dynamics of Regulation Cambridge: Cambridge University Press. Dobbin, F. ed. (2004) The New Economic Sociology Princeton, NJ: Princeton University Press. Dodd, R. (2002) ‘The Structure of OTC Derivatives Markets’ The Financier, 9,1, 1-4. Dunbar, N. (2001) Inventing Money: the story of Long Term Capital Management and the legends behind it. Chichester: John Wiley and Son. Flanagan, S.M. (2001) The Rise of a Trade Association: Group Interactions with the International Swaps and Derivatives Association Harvard Negotiation Law Review 6, 211-264. Fligstein, N. (2001) The Architecture of Markets Princeton NJ; Princeton University Press. Fligstein, N. and Dauer, L. (forthcoming) The Sociology of Markets Annual Review of Sociology Fligstein, N. and Stone Sweet, A. (2002) Constructing Politics and Markets: An Institutionalist Account of European Integration American Journal of Sociology 107,5, 1206-1243. Guillen, M., Collins, R., England, P. and Meyer, M. eds. (2002) The New Economic Sociology New York: Russell Sage Foundation. Halliday, T. and Carruthers, B. (2007) The Recursivity of Law: Global Norm-Making and National Law-Making in the Globalization of Corporate Insolvency Regimes, American Journal of Sociology, 112,4, 1135-1202. Haas, P. (1992) Introduction: Epistemic Communities and International Policy Coordination International Organization 42,3,1-35. Huault, I. and Rainelli, H. (2006) Constructing a globalized over-the-counter financial market: Limits of performativity and problems of cognitive framing (Paper presented to EGOS 2006) ISDA (2005) Collateral Guidelines New York: ISDA ISDA (2006) ISDA Margin Survey 2006 New York: IS International Financial Services, London (2006) Derivatives: City Business Series IFSL: London Keck, M.E. and Sikkink, K. (1999) Transnational Advocacy networks in international and regional politics. International Social Science journal 51, 89-102 Leifer, E. and White, H. (1987) A Structural Approach to Markets in Mizruchi, M. and Schwartz, M. eds. The Structural Analysis of Business Cambridge: Cambridge University Press pp. 85-108. Lowenstein, R. (2001) When Genius Failed: The rise and fall of Long Term Capital Management London: Fourth Estate. MacKenzie, D. and Millo, Y. (2003)’Constructing a Market, Performing Theory: The Historical Sociology of a Financial Derivatives Exchange’ American Journal of Sociology 109,1; 107-145. MacKenzie, D. (2003) Long-term Capital Management and the Sociology of Arbitrage Economy and Society 32: 349-380 MacKenzie, D. (2006) An Engine, Not a Camera: How Financial Models shape Markets Cambridge, Mass.: MIT Press. MacKenzie, D., Muniesa, F. and Siu, L. eds. (2007) Do Economists Make Markets? On the Performativity of Economics Princeton, NJ; Princeton University Press. Morth, U. (2006) Soft Regulation and Global Democracy in Djelic and Andersson eds. Transnational Governance: Institutional Dynamics of Regulation pp.119-135. Quack, S. (2007) Legal Professionals and Transnational lawmaking – A case of distributed agency Organization 14, 5 Riles, A. (2000) The Transnational Appeal of Formalism: The Case of Japan’s Netting Law (Stanford/Yale Junior Faculty Forum Research Paper 00-03 available from Social Science Research Network Electronic Paper Collection) Riles, A. (2005) Collateral Knowledge, (Working paper, Cornell Law School) Slaughter, A-M. (2005) A New World Order, Princeton, NJ; Princeton University Press. Smith, H. (2005) Swaps: has the time finally come for electronic trading? Building an edge: The Financial Services Newsletter, 24, May, 2005: Vol.6/5. Steinherr, A. (2000) Derivatives: the Wild Beast of Finance Chichester: John Wiley and Son. Werlen, T.J. and Flanagan, S. (2002) The 2002 Model Netting Act: A Solution for Insolvency Uncertainty’ Butterworths Journal of International Banking and Financial Law April, 154-165. Zaloom, C. (2006) Out of the Pits: Traders and Technology from Chicago to London Chicago: The University of Chicago Press

Request changes to a record

Document Downloads

More statistics for this item...

Repository Staff Only: item control page

WRAP: Warwick Research Archive Portal is powered by EPrints 3 which is developed by the School of Electronics and Computer Science at the University of Southampton. More information and software credits.