Discussion

A comment on this article and the following article may be found on page 281.

Marshall Blume commented that Partnoy raised the possibility that large institutions could avoid public dissemination of information by creating a derivative that is the same as the underlying asset. This would mean that information from these separate derivatives markets would no longer be shared with other investors, which could lead, ultimately, to inefficiencies in the primary market where the prices are being determined through retail and smaller institutional trading. He added that this might create a monopoly of information among derivatives providers to the detriment of public investors. Partnoy contended that this is not a problem, since for every bilateral contract there is a hedge on the other side.

Joe Mason suggested that derivatives markets deal in myriad complex instruments and hence create a simple problem: there are too many possibilities for complete contracting, and public rules that apply to the complete realm of possibilities cannot be made. Thus private regulation uses reputation formation as a means to resolve uncertainty about these incomplete contracts, since dealers who want to access the market repeatedly try not to default. Nonetheless, he pointed out that equity markets used to be considered complex and unique in the past, whereas now equity is a standardized product. Perhaps this is how regulation evolves as markets become mature and products become standardized. Partnoy agreed that the current derivatives markets reflect a world of incomplete contracts, but this world is evolving toward more plain vanilla swaps that look a lot more like the equity market than other, more complex over-the-counter derivatives.

Cally Jordan questioned whether American depository receipts still serve any purpose or whether they are an instance of the use of regulatory arbitrage creating a product. Jordan also asked whether private rules and arbitration could replace or substitute the legal system in the capital markets of developing and emerging economies. Partnoy responded that the only purpose for public rules is to provide public goods, deal with externalities, and protect and enforce property rights. He was not sure how things would work in a purely private regime and whether private parties would decide that they want to have contract law rules merely for the purposes of enforcing and protecting the property rights that they agree to privately.

Jim Moser believed that the precedent from the Gibson Greeting case, where the Securities and Exchange Commission decided that because the derivative was written on a security it came under SEC regulation, was ignored in the Caiola case that the author mentioned. Partnoy responded that it is difficult to figure out the extent to which the case was a precedent, since the negotiation was extremely complex and the document was ambiguous over whether securities law covered the matter.

Meanwhile, in responding to Edwards's comments, Partnoy agreed in theory that private rules for derivatives trading would be superior, but he noted that the theory does not necessarily apply given existing public rules governing options margin requirements. He was concerned about market power issues not with respect to the exchanges, but instead with respect to the provision of private law in International Swaps and Derivatives Association contracts. Partnoy suggested that there are three kinds of regulatory competition: interjurisdictional regulatory competition, which he described as a good force; intrajurisdictional regulatory competition, where two entities compete directly over the same turf, which is not productive; and multijurisdictional regulatory competition, where partnerships compete over regulatory jurisdictions, which is just beginning in the futures arena.