- credit crisis,
- financial reforms
The significant extraterritorial scope of the derivatives regulation within 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 market. At present, that market exceeds $700 trillion notional value, or over ten times the world GDP. Despite opposition from Wall Street to the present extraterritorial application of almost all of Dodd-Frank’s derivatives regulation, the plain language of the statute requires implementing that regulation on an appropriate extraterritorial basis in order to protect U.S. taxpayers from bailing out financial institutions engaging in foreign derivatives trading, as was required of those taxpayers 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 or a have insured through synthetic derivatives 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 compounded the 2008 subprime fiasco and that led to the U.S. taxpayers’ near-$13 trillion bailout of the financial industry. With worldwide economic stability at stake, tough, but appropriate, extraterritorial regulatory protections for the derivatives markets are needed instantaneously.
This article shows that the extraterritorial reach of Dodd-Frank derivatives 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 demonstrates 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 on extraterritorial basis so long as the United States has a vested relationship to the derivatives transactions in question. 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 extraterritorial application of Dodd-Frank regulations when a derivatives trade either involves a U.S. party or has the potential to substantially threaten the U.S. economy: it demonstrates that Congress has the constitutional authority to direct the extraterritorial application of U.S. derivatives regulations and that such an application aligns with U.S. regulators’ standard enforcement practices. Fifth, the article shows that the extraterritorial scope of Dodd-Frank regulation is necessary to protect U.S. taxpayers from the risks posed by the global derivatives market as it affects U.S. interests and that that scope will benefit U.S. banks and the U.S. economy by establishing a more stable derivatives market. For that matter, the extraterritorial application of Dodd-Frank derivatives standards will protect foreign taxpayers from further bailouts of defaulting and the world economy from systemically risky banking institutions.