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The value of financial market insolvency safe harbours

Paech, Philipp (2016) The value of financial market insolvency safe harbours. Oxford Journal of Legal Studies, 36 (4). pp. 855-884. ISSN 0143-6503

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Identification Number: 10.1093/ojls/gqv041

Abstract

'Safe harbour' is shorthand for a bundle of privileges in insolvency which are typically afforded to financial institutions. They are remotely comparable to security interests as they provide a financial institution with a considerably better position as compared to other creditors should one of its counterparties fail or become insolvent. Safe harbours have been and continue to be introduced widely in financial markets. The common rationale for such safe harbours is that the protection they offer against the fallout of the counterparty’s insolvency contributes to systemic stability, as the dreaded ‘domino effect’ of insolvencies is not triggered from the outset. However, safe harbours also come in for criticism, being accused of accelerating contagion in the financial market in times of crisis and making the market more risky. This paper submits that the more important argument for the existence of safe harbours is liquidity in the financial market. Safe harbour rules do away with a number of legal concepts, notably those attached to traditional security, and thereby allow for the exponentiation of liquidity. Normative decisions of the legislator sanction safe harbours as modern markets could not exist without these high levels of liquidity. To the extent that safe harbours accelerate contagion in terms of crisis, which in principle is a valid argument, specific regulation is well suited to correct this situation, whereas to repeal or significantly restrict the safe harbours would be counterproductive.

Item Type: Article
Official URL: http://ojls.oxfordjournals.org/
Additional Information: © 2016 The Author
Divisions: Law
Subjects: K Law > K Law (General)
Sets: Departments > Law
Date Deposited: 24 Sep 2015 08:57
Last Modified: 20 Jun 2019 02:12
URI: http://eprints.lse.ac.uk/id/eprint/63703

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