Law as a protected designation of origin: the case of Financial Law. Or how the delegation of rule making to private entities may lead to vertical economic integration and to barriers to entry
Abstract
Starting from the puzzling situation of the US, and above all, the UK financial markets, this paper tries to supplement the current explanations of the constant dominance of these two financial centers. Law has specially mattered in this respect., Rather than the superior economic efficiency of UK-US financial law, as the “Law and finance” theory demonstrates, this paper explores how, in the past two decades, the financial industry, and especially the securities and bonds markets, has experienced a growing trend towards an implicit vertical integration due to the legal framework enforced by its actors. This legal framework plays very much the same role as a “protected designation of origin” mechanism. As in the agricultural and food industry, the legal framework helps building barriers to entry and integrating the different actors of the value chain. This “hybrid organization” model can be identified from originating banks to legal and accounting consultants, rating agencies, investment funds, etc. The movement towards delegation of the rule making function to private entities has greatly helped to establish this model – let alone to produce it. Such a delegation approach helped to spread it all over the world, especially across the Atlantic. In order to identify this pattern, this paper mobilizes several analytical approaches: the economics of technical standards applied to law and the legal analysis of financial law and regulation, the “hybrid organization” model from New institutional economics, the economic analysis of self regulation and its potential effects on competition. It relies on observations of the positive legal framework and its evolution, as applied to several segments of the financial markets (mainly securitization and loan syndication), bringing some evidences of this strategic use of law. As a conclusion, this analysis reverses the “Law and finance” analysis. It may also contribute to explain some causes of the current financial crisis, at least of its magnitude.
Bertrand du Marais is Conseiller d’Etat