Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, April 8, 2012

Greenberger on Extraterritoriality of Dodd-Frank and Worldwide Bailouts

The Extraterritorial Application of the Dodd-Frank Act Protects U.S. Taxpayers from Worldwide Bailouts, by Michael Greenberger, University of Maryland Francis King Carey School of Law, was recently posted on SSRN.  Here is the abstract:

The significant extraterritorial scope of the Dodd-Frank Wall Street Reform and Consumer Protection Act promises to foster rigorous international standards for financial regulation that will restore transparency and stability to the global derivatives markets. At present, that market exceeds $700 trillion notional value or over ten times the world GDP. Despite opposition to the extraterritorial application of Dodd-Frank, strictly following the plain language of that statute would protect U.S. taxpayers from bailing out the world’s banks, which they did shortly after the subprime credit meltdown of 2008.

The unregulated nature of the global derivatives market exposes the world to continued systemic risk, especially in a time of worry about sovereign defaults and the defaults of banks that hold sovereign debt. Defaults of that nature are conceded by almost everyone as having the ability to trigger undercapitalized and non-transparent credit derivatives of the kind that were triggered in the 2008 subprime fiasco and that led to the U.S. taxpayer’s near-$13 trillion bailout of the financial industry. With worldwide economic stability at stake, tough regulatory protections for the derivatives markets are needed instantaneously.

This article argues that the extraterritorial scope of Dodd-Frank rules on capitalization, collateralization, and transparency will restore stability and integrity to the global derivatives market. To this end, the article is divided into five parts. First, the article shows how Dodd-Frank aims to regulate derivatives trading so as to avoid, inter alia, the kind of systemic risk that presented itself in the wake of the subprime mortgage meltdown. Second, it establishes that Congress, pursuant to its constitutional authority, intended U.S. financial reforms to apply across jurisdictions so long as the U.S. has a vested relationship to the derivative transaction. Third, the article discusses the current controversy caused by worldwide Too Big to Fail banks and the European Union surrounding the extraterritorial scope of Dodd-Frank-mandated reforms. Fourth, the article defends the cross-jurisdictional application of Dodd-Frank regulations when a derivatives trade threatens either a U.S. party or the U.S. economy: it demonstrates that Congress has the constitutional authority to direct the extraterritorial application of U.S. regulations and that such an application aligns with U.S. regulators’ standard enforcement practices. Fifth, the article establishes that the extraterritorial scope of Dodd-Frank regulation is necessary to protect U.S. taxpayers from the risks posed by the global derivatives market and that it will benefit U.S. banks by establishing a more stable derivatives market. For that matter, the broad application of Dodd-Frank standards will also protect foreign taxpayers from further bailouts of defaulting and systemically risky banking institutions.

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