Elusive Markets: Regulation and Financial Innovation

In my paper I will concentrate on a particular dimension of the encounter between the state and the market that receives relatively little attention in the political economy, economic sociology of anthropology literature: the technical details of financial regulation. Technicalities matter: whether a financial transaction takes the legal form of a loan, security or an insurance contract, whether it is secured or not, and who the risk bearers are can ultimately have powerful effects on the stability to the national and global financial markets and economy. At first sight irrelevant and extremely technical shifts in the language of a standard legal form used by financial institutions can suddenly situate something, that is, economically speaking the same activity, in a totally different field of law. Using the pre-and post-crisis regulation of credit default swaps (CDS) as an example, the paper will show that financial innovation is, at least partially, driven by the aim of moving financial activity away from regulated into unregulated spaces and of maintaining a strategic ambiguity as to what is regulated and how. It will also describe how tiny pockets of unregulated spaces hidden somewhere in the texture of the regulation could expand into trillion-dollar markets, preventing regulators both from assessing systemic risks and volatility, and from monitoring fraudulent market activities. The paper will argue that understanding the repellent effect of regulation on capital is crucial to the ongoing critical engagement of contemporary financial capitalism, and to the understanding of the viability of financial regulation in general.