Systemic risks, regulatory powers and insolvency law : the need of an international instrument on the private law framework for netting

This study examines the legal environment of netting agreements covering financial contracts. It concludes that an international instrument should be developed capable of improving the effectiveness of netting agreements in mitigating systemic risk. To this end, two different aspects of the enforceability of netting agreements are considered: (i) the general enforceability of netting, and (ii) the possibility of precluding the operation of netting a mechanism by way of a regulatory moratorium for considerations of systemic stability. The first part of the study presents the use of netting and the various forms it may take before going on to explain the benefits and drawbacks of enforceable netting agreements. Benefits for individual firms consist in lower counterparty risk and more favourable capital requirements. Benefits for the financial market as a whole flow from greater financial market stability since the contagion of systemically relevant institutions by the default or insolvency of another institution is limited, thus helping to avoid systemic effects. Additionally, the use of netting arrangements can improve overall market liquidity. A potential drawback of enforceability of netting, in certain situations, is that the operation of a netting mechanism could actually work against the purpose of systemic stability where the transfer of parts of the business of an insolvent financial institution to a solvent bridge entity would enhance or maintain value to a greater extent than the operation of a netting agreement would. Regulatory authorities are considering under which conditions a moratorium to halt the netting mechanism until the situation is solved could avoid this threat to systemic stability. The second part of the study examines whether there is the potential to support the purpose of enhanced systemic stability by way of international harmonisation of private and insolvency law. As regards the issue of general enforceability, the global picture of netting legislation is heterogeneous. Given the great practical relevance of the matter, an international instrument could be very useful. As to the issue of private law consequences of regulatory moratoria, the absence of a harmonised framework appears to lead to actual cross-border inconsistency and legal uncertainty as regards financial contracts that are governed by a foreign law. Taking these to aspects into account, this paper recommends that work on developing an international instrument be undertaken. The final part of the study suggests a set of preliminary guidelines for the development of suchan instrument. In the light of the findings of the previous sections, a mixed, two-step approach is recommended. First, a non-binding instrument could be developed, serving as a benchmark and reservoir of legal solutions in respect of the relevant issues. Secondly, isolated aspects relating to both the general enforceability of netting and the accommodation of a regulatory moratorium in foreign private and insolvency law could be dealt with in an international Convention, in particular where cross-border situations involving netting require uniformity of applicable legal rules

Dynamical Correlation Length near the Chiral Critical Point

The dynamical evolution of small systems undergoing a chiral symmetry breaking transition in the course of rapid expansion is discussed. The time evolution of the dynamical correlation length for trajectories passing through a second-order critical point is extracted. It is shown that while the maximum value of the correlation length is bound from above by dynamical effects, the time interval during which it is near its maximum grows steadily with the system size and with decreasing expansion rate.Comment: 3 pages, 1 figure; Presented at the International Europhysics Conference on High Energy Physics EPS (July 17th-23rd 2003) in Aachen, Germany; to be published in EPJC; One typo corrected, one reference adde

Density Perturbations in Heavy-Ion Collisions below the Critical Point

Heavy ion collisions at large baryon density may exhibit a first order phase transition from a chirally symmetric phase to the symmetry broken ground state. This should then lead to large density inhomogeneities, which affect the relative hadron multiplicities.Comment: 1 page, 1 figure, contribution to the GSI annual report 200

Hydrodynamics near a chiral critical point

We introduce a model for the real-time evolution of a relativistic fluid of quarks coupled to non-equilibrium dynamics of the long wavelength (classical) modes of the chiral condensate. We solve the equations of motion numerically in 3+1 spacetime dimensions. Starting the evolution at high temperature in the symmetric phase, we study dynamical trajectories that either cross the line of first-order phase transitions or evolve through its critical endpoint. For those cases, we predict the behavior of the azimuthal momentum asymmetry for highenergy heavy-ion collisions at nonzero impact parameter

Repo and derivatives portfolios between insolvency law and regulation

In the general perception, financial institutions’ immense repo and derivatives portfolios are friends and foes alike: friends, because they provide for levels of market liquidity that would be unimaginable without them. Foes, because both types of transactions are somehow regarded as being unstable and volatile in their nature, potentially exacerbating and accelerating crisis situations. This tension is also reflected in the treatment of repos and derivatives in the event of a corporate crisis. Insolvency law and relevant regulation seem to support and protect repo and derivatives transactions, while at the same time imposing limits on them, trying to balance liquidity arguments with those relating to stability. This paper concludes that regulation is better placed than insolvency law to address systemic stability concerns, whereas relevant insolvency rules guarantee high levels of liquidity while they are ineffective in terms of stability. The paper will concentrate on EU and US law, complemented by international benchmarks. It expands on certain aspects first developed my earlier paper on insolvency safe harbours

The governance of blockchain financial networks

Since the emergence of the virtual currency Bitcoin in 2009, a new, Internet-based way of recording entitlements and enforcing rights has increasingly captured the interest of businesses and governments. The technology is commonly called ‘blockchain’ and is often associated with a closely related phenomenon, the ‘smart contract’. The market is now exploring ways of using these concepts for financial assets, such as securities, legal tender and derivative contracts. This article develops a conceptual framework for the governance of blockchain-based networks in financial markets. It constructs a vision of how financial regulation and private law should set the boundaries of this new technology in order to protect market participants and societies at large, while at the same time allowing for the necessary room for innovation