Hostname: page-component-586b7cd67f-dsjbd Total loading time: 0 Render date: 2024-11-27T11:19:50.573Z Has data issue: false hasContentIssue false
  • English
  • Français

Legal Documents as Means of Financial Abstraction: How Bankers’ Lawyers Constructed Swaps and Changed Finance

Published online by Cambridge University Press:  02 September 2021

Pascale Cornut St-Pierre
Pascale Cornut St-Pierre*
Affiliation:
Faculty of Law(Civil Law Section) of University of Ottawa [[email protected]].
Get access

Abstract

Finance rests on a process of abstraction, based on various material devices that have been studied by economic sociologists in recent years. The fact that many of those devices are legal in nature has not attracted much attention, even though financial instruments are typically embodied in legal documents. This paper argues that interactions involving legal documents shape both financial markets and their regulation, by specifying the contextual elements that will be deemed relevant in interpreting financial commitments. It takes as a case study the emergence of swaps since the 1980s. Through their work in standardizing, commenting, and litigating swaps contracts, bankers’ lawyers were able to recast obligations between banks and their clients in more abstract terms, discarding all references to specific business projects. Such abstraction simultaneously allowed the spectacular development of swaps markets, their positioning on the fringes of regulations, and the strengthening of bankers’ prerogatives against their clients.

Keywords

Law and FinanceFinancializationLegal Work and Financial InnovationFinancial Derivatives’ Legal HistoryFinancial Regulation and Categorization
Type
Research Article
Information
European Journal of Sociology / Archives Européennes de Sociologie , Volume 62 , Issue 2 , August 2021 , pp. 309 - 335
Copyright
© European Journal of Sociology 2021

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

This article stems from doctoral research funded by the Fonds de Recherche du Québec–Société et Culture, the Social Sciences and Humanities Research Council of Canada, and the Canadian Institute for Advanced Legal Studies. I would like to thank Nafise Shooshinasab, Thomas Angeletti, Benjamin Lemoine and the anonymous reviewers for their helpful comments on earlier versions of this paper.

References

BIBLIOGRAPHY

Benton, David, Devine, Patrick and Jarvis, Philip, 1997. “Credit Derivatives Are Not Insurance Products,” International Financial Law Review, 16: 29–31.Google Scholar
Biggins, John, 2012. “‘Targeted Touchdown’ and ‘Partial Liftoff’: Post-Crisis Dispute Resolution in the OTC Derivatives Markets and the Challenge for ISDA,” German Law Journal, 13 (12): 1297.CrossRefGoogle Scholar
Bis (Bank for International Settlements), 2020. Global OTC Derivatives Market [https://stats.bis.org/statx/srs/table/d5.1?f=pdf, accessed June 17, 2020].Google Scholar
Braithwaite Joanne, P., 2011. “The Inherent Limits of ‘Legal Devices’: Lessons for the Public Sector’s Central Counterparty Prescription for the OTC Derivatives Markets,” European Business Organization Law Review, 12 (1): 87–119.CrossRefGoogle Scholar
Braun, Benjamin, 2016. “From Performativity to Political Economy: Index Investing, ETFs and Asset Manager Capitalism,” New Political Economy, 21 (3): 257–273.CrossRefGoogle Scholar
Bryan, D. and Rafferty, M., 2006. Capitalism with Derivatives: A Political Economy of Financial Derivatives (Basingstoke, Palgrave Macmillan).CrossRefGoogle Scholar
Callon, Michel, Millo, Yuval and Muniesa, Fabian, ed., 2007. Market Devices (Malden, Blackwell).Google Scholar
Chabert, Pierre-Yves, 1989. “The Legal Treatment of Swap Transactions in France,” Law and Policy in International Business, 21: 153–210.Google Scholar
Christophers, Brett, 2014. “From Marx to Market and Back Again: Performing the Economy,” Geoforum, 57: 12–20.CrossRefGoogle Scholar
Constantin, Alexis, 2010. “Les outils contractuels de gestion des risques financiers,” Revue de droit bancaire et financier, 6.Google Scholar
Cornut St-Pierre, Pascale, 2016. “Eligible Financial Contracts and the Many Faces of Derivatives: A Brief History of the ISDA Master Agreement,” Annual Review of Insolvency Law, 2015: 617–661.Google Scholar
Cunningham, Daniel P., Golden, Jeffrey B. and Berry, John, 2005. “Lawyers in Agreement,” Risk: ISDA 20th Anniversary: 20–21.Google Scholar
Dezalay, Yves, 1993. “Des notables aux conglomérats d’expertise : Esquisse d’une sociologie du ‘big bang’ juridico-financier,” Revue d’économie financière, 25: 23–38.CrossRefGoogle Scholar
Espeland Wendy, Nelson and Stevens, Mitchell L., 1998. “Commensuration as a Social Process,” Annual Review of Sociology, 24: 313–343.CrossRefGoogle Scholar
Field, Peter, 2005. “Looking Back over 20 Years”, Risk: ISDA 20th Anniversary: 8–18.Google Scholar
Finnerty, John D. and Brown, Mark S., 2001. “An Overview of Derivatives Litigation, 1994 to 2000,” Fordham Journal of Corporate and Financial Law, 7: 131–158.Google Scholar
Flanagan, Sean M, 2001. “The Rise of a Trade Association: Group Interactions Within the International Swaps and Derivatives Association,” Harvard Negotiation Law Review, 6: 211–264.Google Scholar
Ford, Cristie and Liao, Carol, 2010. “Power Without Property, Still: Unger, Berle, and the Derivatives Revolution,” Seattle University Law Review, 33 (4): 889–929.Google Scholar
Forray, Vincent, 2016. “À la croisée du droit des obligations et de l’ingénierie financière – Remarques sur la nécessité sociale de l’analyse juridique,” Cahiers de droit, 57 (1): 25–53.CrossRefGoogle Scholar
Froud, Julie, Johal, Sukhdev, Leaver, Adam, Williams, Karel, 2006. Financialization and Strategy: Narrative and Numbers (London, Routledge).CrossRefGoogle Scholar
Funk, Russel J. and Hirschman, Daniel, 2014. “Derivatives and Deregulation: Financial Innovation and the Demise of Glass-Steagall,” Administrative Science Quarterly, 59 (4): 669–704.CrossRefGoogle Scholar
Gibson, Willa E., 1999. “Are Swap Agreements Securities or Futures? The Inadequacies of Applying the Traditional Regulatory Approach to OTC Derivatives Transactions,” Journal of Corporation Law, 24: 379–416.Google Scholar
Graeber, David, 2014. Debt: The First 5,000 Years (Brooklyn, Melville House).Google Scholar
Hartmann, Michael, 1995. “Bank Lawyers: A Professional Group Holding the Reins of Power,” in Dezalay, Yves and Sugarman, David, eds, Professional Competition and Professional Power (Abingdon, Routledge: 205–225).Google Scholar
Helleiner, Eric, Pagliari, Stefano and Spagna, Irene, eds, 2018. Governing the World’s Biggest Market: The Politics of Derivatives Regulation After the 2008 Crisis (Oxford, Oxford University Press).Google Scholar
Henderson, Schuyler K., 1989. “Commodity Swaps: Ready to Boom?,” International Financial Law Review, 8: 24–30.Google Scholar
Henderson, Schuyler K., 2010. Henderson on Derivatives (London, LexisNexis).Google Scholar
Huault, Isabelle and Rainelli-Weiss, Hélène, 2012. “Constructing the Market for Credit Derivatives: How Major Investment Banks Handle Ambiguities,” in Huault, Isabelle and Richard, Chrystelle, eds, Finance: The Discreet Regulator. How Financial Activities Shape and Transform the World (New York, Palgrave Macmillan: 233–260).CrossRefGoogle Scholar
Huault, Isabelle and Rainelli-Weiss, Hélène, 2014. “Is Transparency a Value on OTC Markets? Using Displacement to Escape Categorization,” Working Papers, 55 (Paris, Fondation Maison des sciences de l’homme).Google Scholar
Hudson, Michael, 2010. “From Marx to Goldman Sachs: The Fictions of Fictitious Capital, and the Financialization of Industry,” Critique, 38 (3): 419–444.CrossRefGoogle Scholar
Juurikkala, Oskari, 2011. “Credit Default Swaps and Insurance: Against the Potts Opinion,” Journal of International Banking Law and Regulation, 3: 132–139.Google Scholar
Kahan, Marcel and Klausner, Michael, 1997. “Standardization and Innovation in Corporate Contracting (or ‘the Economics of Boilerplate’),” Virginia Law Review, 83 (4): 713–770.CrossRefGoogle Scholar
Kelly, Jonathan, 1998. “New Products Open Banks to New Risks,” International Financial Law Review, 17: 24–25.Google Scholar
Kennedy, Duncan, 2006. “Three Globalizations of Law and Legal Thought: 1850-2000,” in Trubek, David and Santos, Alvaro, eds, The New Law and Economic Development: A Critical Appraisal (Cambridge, Cambridge University Press: 19–73).CrossRefGoogle Scholar
Kimball-Stanley, Arthur, 2008. “Insurance and Credit Default Swaps: Should Like Things Be Treated Alike?,” Connecticut Insurance Law Journal, 15 (1): 241–266.Google Scholar
Klein Linda, B., 1986. “Interest rate and currency swaps: Are they securities?,” International Financial Law Review, 5: 35–39.Google Scholar
Klett, Lauren S., 1989. “Oil-Price Swaps: Should These Innovative Financial Instruments be Subject to Regulation by the Commodity Futures Trading Commission or the Securities Exchange Commission?,” Dickinson Law Review, 93: 367–400.Google Scholar
Kojima, J. Christopher, 1995. “Product-based Solutions to Financial Innovation: The Promise and Danger of Applying the Federal Securities Laws to OTC Derivatives,” American Business Law Journal, 33 (2): 259–339.CrossRefGoogle Scholar
Krippner, Greta R., 2011. Capitalizing on Crisis: The Political Origins of the Rise of Finance (Cambridge, Harvard University Press).Google Scholar
La Berge Leigh, Claire, 2014. “The Rules of Abstraction: Methods and Discourses of Finance,” Radical History Review, 118: 93–112.CrossRefGoogle Scholar
Lagna, Andrea, 2017. “The Financialisation of Local Governments: Evidence from the Italian Case” in Erturk, Ismail and Gabor, Daniela, eds, The Routledge Companion to Banking Regulation and Reform (London, Routledge: 208–221).Google Scholar
Lapavitsas, Costas, 2011. “Theorizing Financialization,” Work, Employment and Society, 25 (4): 611–626.CrossRefGoogle Scholar
Lazonick, William and O’Sullivan, Mary, 2000. “Maximizing Shareholder Value: A New Ideology for Corporate Governance,” Economy and Society, 29 (1): 13–35.CrossRefGoogle Scholar
Lemoine, Benjamin, 2017. “The Politics of Public Debt Financialisation: (Re)Inventing the Market for French Sovereign Bonds and Shaping the Public Debt Problem (1966-2012),” in Buggeln, Marc, Daunton, Martin and Nützenadel, Alexander, The Political Economy of Public Finance. Taxation, State Spending and Debt since the 1970s (Cambridge, Cambridge University Press: 240–261).CrossRefGoogle Scholar
Lépinay, Vincent-Antonin, 2011. Codes of Finance: Engineering Derivatives in a Global Bank (Princeton, Princeton University Press).CrossRefGoogle Scholar
Lipuma, Edward and Lee, Benjamin, 2004. Financial Derivatives and the Globalization of Risk (Durham, Duke University Press).Google Scholar
Llewellyn, Karl, 1950. “Remarks on the Theory of Appellate Decision and the Rules or Canons About How Statutes Are to Be Construed,” Vanderbilt Law Review, 3: 395–406.Google Scholar
Mabbett, Deborah, 2020. “Reckless Prudence: Financialization in UK Pension Scheme Governance After the Crisis,” Review of International Political Economy [https://doi.org/10.1080/09692290.2020.1758187].CrossRefGoogle Scholar
Mackenzie, Donald, 2006. An Engine, Not a Camera: How Financial Models Shape Markets (Cambridge, MIT Press).CrossRefGoogle Scholar
Martin, Randy, 2002. Financialization of Daily Life (Philadelphia, Temple University Press).Google Scholar
Marx, Karl, [1887] 2010. Capital: Volume 1, in Marx, Karl and Engels, Frederick, Collected Works . Volume 35 (London, Lawrence & Wishart).Google Scholar
Mattout, Jean-Pierre, 1987. “Opérations d’échange de taux d’intérêt et de devises: qualification et régimes juridiques en droit français. Défaillance de l’une des parties. 1re partie,” Banque, 468: 24–34.Google Scholar
McBarnet, Doreen, 1984. “Law and Capital: The Role of Legal Form and Legal Actors,” International Journal of the Sociology of Law, 12: 231–238.Google Scholar
McBarnet, Doreen, 2010. “Financial Engineering or Legal Engineering? Legal Work, Legal Integrity and the Banking Crisis,” in McNeil, Iain G. and O’Brien, Justin, eds, The Future of Financial Regulation (Oxford, Hart Publishing: 67-82).CrossRefGoogle Scholar
Mengle, David, 2010. “Concentration of OTC Derivatives Among Major Dealers,” ISDA Research Notes [https://www.isda.org/a/VSiDE/].Google Scholar
Mehrling, Perry, 2005. Fischer Black and the Revolutionary Idea of Finance (Hoboken, John Wiley & Sons).Google Scholar
Mehrling, Perry, 2013. “The Inherent Hierarchy of Money,” in Taylor, Lance, Rezai, Armon and Michl, Thomas R., eds, Social Fairness and Economics: Economic Essays in the Spirit of Duncan Foley (New York, Routledge: 394–404).Google Scholar
Millo, Yuval, 2007. “Making Things Deliverable: The Origins of Index-based Derivatives,” in Callon, Michel, Millo, Yuval and Muniesa, Fabian, eds, Market Devices (Malden, Blackwell: 196–214).Google Scholar
Moran, Michael, 1987. “An Outpost of Corporatism: The Franchise State on Wall Street,” Government and Opposition, 22 (2): 206–223.CrossRefGoogle Scholar
Muniesa, Fabian, 2011. “Comment la Bourse fait ses prix. Ethnographie d’un cours d’action boursière,” in Houdart, Sophie and Thiery, Olivier, eds, Humains, non-humains (Paris, La Découverte: 176–190).CrossRefGoogle Scholar
Murphy, David, 2013. OTC Derivatives: Bilateral Trading and Central Clearing. An Introduction to Regulatory Policy, Market Impact and Systemic Risk (Basingstoke, Palgrave Macmillan).CrossRefGoogle Scholar
Nicholls, Christopher C., 2013. Corporate Finance and Canadian Law (Toronto, Carswell).Google Scholar
Palley, Thomas I., 2014. Financialization: The Economics of Finance Capital Domination (New York, Palgrave Macmillan).Google Scholar
Partnoy, Frank, 2009. Infectious Greed: How Deceit and Risk Corrupted the Financial Markets (New York, Public Affairs).Google Scholar
Pérignon, Christophe and Vallée, Boris, 2017. “The Political Economy of Financial Innovation: Evidence from Local Governments,” Review of Financial Studies, 30 (6): 1903–1934.CrossRefGoogle Scholar
Pistor, Katharina, 2013. “A Legal Theory of Finance,” Journal of Comparative Economics, 41 (2): 315–330.CrossRefGoogle Scholar
Pistor, Katharina, 2019. The Code of Capital: How the Law Creates Wealth and Inequality (Princeton, Princeton University Press).Google Scholar
Poitras, Geoffrey, 2009. “From Antwerp to Chicago: the History of Exchange Traded Derivative Security Contracts,” Revue d’histoire des sciences humaines, 20 (1): 11–50.CrossRefGoogle Scholar
Potts, Robin, 1997. Credit Derivatives: Opinion (on file with author).Google Scholar
Preda, Alex, 2006. “Socio-Technical Agency in Financial Markets: The Case of the Stock Ticker,” Social Studies of Science, 36 (5): 753–782 CrossRefGoogle Scholar
Preda, Alex, 2007. “Where Do Analysts Come From? The Case of Financial Chartism,” Sociological Review, 55 (2 suppl): 40–64.CrossRefGoogle Scholar
Riles, Annelise, 2011. Collateral Knowledge: Legal Reasoning in the Global Financial Markets (Chicago, Chicago University Press).CrossRefGoogle Scholar
Ross, Maria and Davies, Charlotte, 2001. “Deriving Value For Insurance Companies,” International Financial Law Review, 20: 11–13.Google Scholar
Scalcione, Raffaele, 2011. The Derivatives Revolution: A Trapped Innovation and a Blueprint for Regulatory Reform (Alphen, Kluwer).Google Scholar
Schapiro, Mary L., 1993. “The Derivatives Revolution and the World Financial System,” Eighth Annual Symposium for the Foundation for Research in International Banking and Finance (Lugano, Switzerland).Google Scholar
Schwartz, Robert F., 2007. “Risk Distribution in the Capital Markets: Credit Default Swaps, Insurance and a Theory of Demarcation,” Fordham Journal of Corporate and Financial Law, 12: 167–201.Google Scholar
Stoakes, Christopher, 1985. “Standardising Swaps Documentation,” International Financial Law Review, 4: 11–15.Google Scholar
Tung, Frederick, 2009. “Leverage in the Board Room: The Unsung Influence of Private Lenders in Corporate Governance,” UCLA Law Review, 57: 115–181.Google Scholar
Van der Zwan, Natasha, 2014. “Making Sense of Financialization,” Socio-Economic Review, 12: 99–129.CrossRefGoogle Scholar
Vasudevan, Ramaa, 2017. “The Significance of Marx’s Theory of Money,” Economic and Political Weekly, 52 (37): 70–82.Google Scholar
Wang, Jessica, 2009. “Neo-Brandeisianism and the New Deal: Adolf A. Berle, Jr., William O. Douglas, and the Problem of Corporate Finance in the 1930s,” Seattle University Law Review, 33 (4): 1221–1246.Google Scholar
Weber, Max, 2000. “Stock and Commodity Exchanges,” Theory and Society, 29 (3): 305–338.CrossRefGoogle Scholar
Weber, Max, [1930] 2001. The Protestant Ethic and the Spirit of Capitalism (London, Routledge).Google Scholar
Weber, Max, [1981] 2017. General Economic History (London, Taylor and Francis).CrossRefGoogle Scholar
Wymeersch, Eddy, 2013. “Regulation and Case Law Relating to Financial Derivatives,” Revue de droit bancaire et financier, 1.Google Scholar
Wynne, Geoffrey and Cuthbert, Neil, 1984. “The Banker’s Lawyer,” International Financial Law Review, 3: 35.Google Scholar