May 2008 The development of the global markets as rule-makers The development of the global markets as rule-makers: engagement and legitimacy JULIA BLACK London School of Economics and Political Science DAVID ROUCH Freshfields Bruckhaus Deringer The first article in this series 1 assessed the extent to which the markets are able to act as rule-makers and the nature of the “normative arena” in which they do so. This article considers how their role could develop and the implications of that in terms of market engagement in the rule-making process and legitimacy. The final article in the series will look at some of the risks this changing landscape creates, particularly in the context of dispute resolution and enforcement. A. The future of the normative arena The extent of the normative arena – the space within which the markets are instrumental in formulating rules – is set by a number of factors. Many are ultimately the domain of the public sector. But there is an increasingly symbiotic relation- ship between the public sector and the markets in setting and implementing standards. The future of markets as rule- makers must therefore be seen in the context of the changing role of the public sector in financial governance and, in particular, the sort of standards and rules it is likely to generate. It is not realistic to talk of an international regime for financial governance if by that we mean Napoleonic design. However,national governance is exercised within an increas- ingly global environment, in which the financial markets are one of the dominant creative forces. As a result it is being rearticulated by reference to a complex network of regional and global legal and political groupings, both in the financial sector and beyond. This has produced something that can legitimately be described as a system of international finan- cial governance which, if current trends continue, 2 can be expected to provide the basis for something more formal- ised. Part of that process is likely to involve a growing convergence of domestic regimes with international standards and systems, although harmonising some legal frameworks relevant to the financial sector, such as insol- vency and property law, can only ever be a very long-term project. Political and legal fragmentation is one of the main moti- vations for formulating market-based, private law solutions and for using regulatory principles which help to create a space within which the markets can make rules. Growing convergence could therefore suggest a diminished role for the markets as rule-makers. However, that is unlikely to be the case; high levels of fragmentation will persist in some areas for the foreseeable future and, even with convergence, factors such as the dynamism and complexity of the markets are likely to sustain the need for market rule-making. 1. International financial governance Increasingly complex interaction between nation states and regional and international bodies has resulted in a series of relationships that can be regarded as a system of global finan- cial governance. 3 The process is often at its most intense following moments of systemic stress, although that is not the only stimulus. 4 Current financial conditions have resulted in a further surge. However, even before that, there was a growing pressure for greater public sector coordina- tion in its response to the international financial markets. 5 The development of international governance in the finan- cial sector seems likely to be concentrated through these bodies for the foreseeable future and lead to a growing formalisation of relationships. That is partly because they are in place already and the need is immediate – markets tend not to wait for perfection, but to work with what they have. 6 More positively, it is important not to understate the role of intelligent design; while each element in the struc- ture has been established in response to particular needs, this has not been an isolated process – which is why the result is sufficiently coherent to be described as a “system”. 7 Many of the participants in this system produce sets of standards and principles that are relevant to the shape of the normative arena. Key elements in the system are the Finan- cial Stability Forum (FSF) and the International Monetary Fund (IMF). Both have gained even greater prominence by the need to respond to current market conditions, which 218 Law and Financial Markets Review May 2008 SPECIAL FEATURE