Collateral Knowledge: Legal Reasoning in the Global Financial Markets (review)

This is a rich book, full of ideas and observations drawn partly from extensive fieldwork—particularly in Tokyo over 1997–2001, just as Japan was implementing its “Big Bang” reforms aimed at making its financial markets more “free, fair and global” (p. 120). It focuses on a little-examined aspect in derivatives trading, where mostly large financial institutions contract to “swap” things at a future date (p. 2). To guard against the “credit risk” that one’s counterparty may default before that date, parties usually require each other to post “collateral” security—assets bound by a separate obligation, independently securing fulfillment of the primary obligation (p. 1).

Riles is intrigued by the way collateral in the swaps market has largely retained its legitimacy despite the global financial crisis and despite the worldwide spread of such “global private law solutions” (p. 7), seemingly in lieu of direct governmental regulation of financial markets. Through an ethnographic study of how collateral came to be used and regulated in Tokyo’s international swap market, due partly to the standard-form contracts and lobbying efforts from the International Swaps and Derivatives Association (ISDA), Riles argues that regulation emerges as “neither inherently private nor public, neither global nor local. Global financial markets governance is also . . . a set of routinized but highly compartmentalized knowledge practices, many of which have a technical legal character” (p. 10, original emphasis).

She perceives such legal knowledge practices as not simply reducible to socioeconomic or political forces but as displaying their own “epistemological and material autonomy” (p. 20). Riles aims to show how such an understanding can suggest a model and techniques for re-regulation of a space between “the free market mindset and the technocratic mindset” (p. 26).

Chapter 1 introduces us to the mundane “back room” of the swaps market. Law-trained employees merely “paper the deals” made by the traders. Collateral puts the holder ahead of other creditors if the counterparty defaults, rather than, say, undertaking further swaps with that party or others to cancel out or hedge the credit risk, or dealing only with demonstrably more creditworthy or trusted parties (p. 41). Banks that collateralize are also permitted to lower their capital adequacy requirements: “a delegation of state authority to monitor systemic risk to private parties” (p. 44).

Yet this private law regime of collateral depends not only on effective valuation techniques but also on the requirements under applicable national law (itself often difficult to identify) for creating an enforceable security interest, and the latter’s status under contract and bankruptcy law. The ISDA therefore not only supplies standard-form contracts, containing clauses favored by its traders; it hires local lawyers to investigate possible discrepancies with local law and lobbies for validation or legislative reform to ensure enforceability. Nonetheless, what ISDA members were making “were not rules, not norms, not sources of law, but documents” (p. 49). The collaboration achieved was “normatively and socially thin” (p. 54), “an alternative to developing shared private norms” (p. 55), as found in some other markets.

From this ethnology focused primarily on the private governance side, Riles infers several general features of “collateral” technical legal knowledge. For example, it involves certain ideologies (such as legal instrumentalism), categories of experts (scholars, bureaucrats, and lawyers viewing the law as a tool and themselves as technicians), a problem-solving paradigm, and a form of reasoning and argumentation. Such legal technicalities are not inherently either public or private (pp. 64–65), although public regulation pays even greater attention to the ends rather than to the means or the legal tools and craft (p. 73).

Chapter 2 delves into the public side of technical legal knowledge. Financial crises in Asia in 1997–98 highlighted fears of a domino effect, if banks began to fail. Providing collateral could help, but this was expensive if assets had to be tied up for the transaction’s entire value. The ISDA master...