November 15, 2008
The G20 - principles or rules?
Posted by David Zaring

International regulation is everywhere, and one way to think about it is that it tends to evolve in three stages.  First, domestic regulators agree to share information with their foreign counterparts.  This doesn't harmonize regulation, but it does solve some globalization problems (at least from the regalator's perspective).  Second, the mechanism used for international information exchanges becomes the forum for the generation of principles of regulation to which the regulators can agree.  These tend to be gauzy, short, and vague, and it isn't clear that they amount to much.  Third, some of these institutions actually develop their own set of hard rules, as the Basle Committee on Banking Supervision did.  That's difficult, but notable, international governance.

All of this is a way of saying that one question about the G20 meetings would be whether they would agree on principles, which is of only a little interest, or set up a rulemaking process, which would matter a great deal.  The statement release by the group today does indeed suggest that the US managed to hold the lines at unspecific principlemaking:

We pledge to strengthen our regulatory regimes, prudential oversight, and risk management, and ensure that all financial markets, products and participants are regulated or subject to oversight, as appropriate to their circumstances. We will exercise strong oversight over credit rating agencies, consistent with the agreed and strengthened international code of conduct. We will also make regulatory regimes more effective over the economic cycle, while ensuring that regulation is efficient, does not stifle innovation, and encourages expanded trade in financial products and services. We commit to transparent assessments of our national regulatory systems.

Worthy, noble goals, all.  On the other hand, the action plan that follows the agreement on principles in some cases is a bit more substantive; the IMF gets a to do list, and perhaps this looks like agreement on credit default swap regulation (though it doesn't have to be read that way)?  At least it encourages CDS exchanges....

Supervisors and regulators, building on the imminent launch of central counterparty services for credit default swaps (CDS) in some countries, should: speed efforts to reduce the systemic risks of CDS and over-the-counter (OTC) derivatives transactions; insist that market participants support exchange traded or electronic trading platforms for CDS contracts; expand OTC derivatives market transparency; and ensure that the infrastructure for OTC derivatives can support growing volumes.

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