Current Issue

The Mechanism of Derivatives Market Efficiency

Dan Awrey

These are not your parents’ financial markets. A generation ago, the image of Wall Street was one of floor traders and stockbrokers, of opening bells and ticker symbols, of titans of industry and barbarians at the gate. These images reflected the prevailing view in which stock markets stood at the center of the financial universe. The high point of this equity-centric view coincided with the development of a significant body of empirical literature examining the efficient market hypothesis (EMH): the prediction that prices within an efficient stock market will fully incorporate all available information. Over time, this equity-centric view became conflated with these empirical findings, transforming the EMH in the eyes of many observers from a testable prediction about how rapidly new information is incorporated into stock prices into a more general—and generally unexamined—statement about the efficiency of financial markets.

In their seminal 1984 article The Mechanisms of Market Efficiency, Ron Gilson and Reinier Kraakman advanced a causal framework for understanding how new information becomes incorporated into stock prices. Gilson and Kraakman’s framework provided an institutional explanation for the empirical findings supporting the EMH. It has also played an influential role in public policy debates surrounding securities fraud litigation, mandatory disclosure requirements, and insider trading restrictions. Yet despite its enduring influence, there have been few serious attempts to extend Gilson and Kraakman’s framework beyond the relatively narrow confines in which it was originally developed: the highly regulated, order-driven, and extremely liquid markets for publicly traded stocks.

This Article examines the mechanisms of derivatives market efficiency. These mechanisms respond to information and other problems not generally encountered within conventional stock markets. These problems reflect important differences in the nature of derivatives contracts, the structure of the markets in which they trade, and the sources of market liquidity. Predictably, these problems have led to the emergence of very different mechanisms of market efficiency. This Article describes these problems and evaluates the likely effectiveness of the mechanisms of derivatives market efficiency. It then explores the implications of this evaluation in terms of the current policy debates around derivatives trade reporting and disclosure, the macroprudential surveillance of derivatives markets, the push toward mandatory central clearing of derivatives, the prudential regulation of derivatives dealers, and the optimal balance between public and private ordering.

Visual Rulemaking

Elizabeth G. Porter & Kathryn A. Watts

Federal rulemaking has traditionally been understood as a text-bound, technocratic process. However, as this Article is the first to uncover, rulemaking stakeholders—including agencies, the President, and members of the public—are now deploying politically tinged visuals to push their agendas at every stage of high-stakes, often virulently controversial, rulemakings. Rarely do these visual contributions appear in the official rulemaking record, which remains defined by dense text, lengthy cost-benefit analyses, and expert reports. Perhaps as a result, scholars have overlooked the phenomenon we identify here: the emergence of a visual rulemaking universe that is splashing images, GIFs, and videos across social media channels. While this new universe, which we call “visual rulemaking,” might appear to be wholly distinct from the textual rulemaking universe on which administrative law has long focused, the two are not in fact separate. Visual politics are seeping into the technocracy.

This Article argues that visual rulemaking is a good thing. It furthers fundamental regulatory values, including transparency and political accountability. It may also facilitate participation by more diverse stakeholders—not merely regulatory insiders who are well-equipped to navigate dense text. Yet we recognize that visual rulemaking poses risks. Visual appeals may undermine the expert-driven foundation of the regulatory state, and some uses may threaten or outright violate key legal doctrines, including the Administrative Procedure Act and longstanding prohibitions on agency lobbying and propaganda. Nonetheless, we conclude that administrative law theory and doctrine ultimately can and should welcome this robust new visual rulemaking culture.

Death and Its Dignities

Kristen Loveland

Dignity has been associated with death in two very different areas of constitutional jurisprudence: assisted suicide and the death penalty. This Note seeks to analyze what the concept of dignity means in these two contexts: who is the subject of dignity and what are dignity’s requirements? It argues that assisted suicide foregrounds the subjective dignity of the individual; what dignity involves is largely, though not wholly, a question of what an individual considers a dignified way to die. By contrast, the subject of dignity in death penalty jurisprudence is the collective and not the individual. Inasmuch as the jurisprudence claims to speak to the dignity of the individual, that dignity is objective and extends no further than collective dignity’s reach. As a result, what constitutes dignity in execution is almost wholly determined by what appears dignified to society. This Note ends by critically assessing how the two constitutional areas that link death and dignity may fruitfully inform each other. It suggests that assisted suicide’s individualistic dignity includes not just a right to decide how to die, but also a responsibility to collective society to consider how the nature of that suicide may impact collective dignity. In turn, in the death penalty context, states and courts should import subjective individual dignity considerations and reconsider whether their invocation of “dignity” in fact reflects a collective valuation of dignity or merely assuages social sensibilities by masking the reality of death.

Ably Queer: The ADA as a Tool in LGBT Antidiscrimination Law

Alok K. Nadig

Being queer—like deviating from the norm in any way—can be socially disabling. So why not turn to disability law for redress? After a nationwide same-sex marriage ruling from the Supreme Court, many are devoting more attention to the current absence of uniform, federal employment discrimination protections for lesbian, gay, bisexual, and transgender (LGBT) people. As Title VII has grown friendlier to claims made by LGBT individuals, people are debating the merits of cognizing anti-LGBT bias as sex discrimination in the law. Meanwhile, the Equality Act, introduced in Congress in 2015, would ban discrimination on the basis of LGBT status throughout the country. But while vital, Title VII and the Equality Act could leave a gap through which queer people whose identities are not legible within the gender binary and are not politically stable as lesbian, gay, bisexual, or transgender are left out. This Note argues that LGBT people should challenge their current exclusion from the Americans with Disabilities Act (ADA) through constitutional litigation to fill this gap. Through its disavowal of traditional identity politics, the ADA offers an additional comparative advantage that has transformative potential for queer plaintiffs: Its foundation on the social model of disability topples the LGBT rights movement’s historic emphasis on respectability to enable unrestrained self-determination.

Once More unto the Breach: The Constitutional Right to Informational Privacy and the Privacy Act

Caleb A. Seeley

With the rise of the internet and computer storage, the loss and theft of individuals’ private information has become commonplace. Data breaches occur with increasing regularity, leading some to question if the current statutory and regulatory schemes properly incentivize the maintenance of adequate security measures amongst federal agencies. This Note argues that inadequate data security practices by government agencies implicate the constitutional right to informational privacy. While the Court has previously upheld intrusive personal information collection programs, the Privacy Act, which plays an essential role in the Court’s decisions, has been weakened significantly by recent interpretation of its damages provision. Given this change in the effectiveness of the statutory protection of private data, lawsuits alleging a violation of the constitutional right to informational privacy might succeed and could help incentivize optimal levels of data security amongst government agencies.

The Validity of the Clean Power Plan’s Emissions Trading Provisions

Jessica M. Wilkins

In June 2013, President Obama issued a memorandum directing the Environmental Protection Agency (EPA) to use its authority under Sections 111(b) and 111(d) of the Clean Air Act to address carbon pollution from new and existing power plants. Over two years later, the EPA issued the final rule, known as the Clean Power Plan, and a proposed federal plan that will be implemented in states that do not submit their own plan under the Clean Power Plan. Both the Clean Power Plan and the EPA’s proposed federal plan rely heavily on emissions trading programs to reduce carbon emissions in a cost-effective manner. Emissions trading programs set a cap on the total amount of a pollutant permitted and allow sources to buy and sell allowances based on how much of the pollutant each source is reducing or emitting. Opponents of the Clean Power Plan and its trading provisions are challenging the rule on the grounds that it is beyond the EPA’s authority under the Act.

This Note suggests that these emissions trading provisions are valid for two related reasons: first, the EPA has successfully implemented emissions trading programs under Section 110 of the Act in the past that demonstrate the agency’s longstanding history of using these programs; and second, emissions trading has been upheld by the Supreme Court as permissible under Section 110, and Section 111(d)—under which the Clean Power Plan was promulgated—contains two substantive references to Section 110. Taken together, the EPA’s past use of emissions trading programs and the statutory references in Section 111 suggest that the trading provisions in the Clean Power Plan and the proposed federal plan are a permissible exercise of the EPA’s authority.

Referees of Republicanism: How the Guarantee Clause Can Address State Political Lockup

Jarret A. Zafran

Our Government derives its legitimacy from the consent of the governed, generally measured through our elections. When incumbent powers create structures and rules for our politics that entrench the status quo and limit voter control, however, the legitimacy of that consent is tested. For more than fifty years, and in spite of the “political question doctrine,” the Supreme Court has adjudicated challenges to franchise restrictions, gerrymandering, ballot access provisions, and more. In doing so, the Court utilizes doctrinal frameworks that focus on harms to individual rights and not on structural harms to the competitiveness, accountability, and responsiveness of our politics. This myopic view leaves systemic entrenchment and political lockup largely untouched. Scholars have identified these doctrinal deficiencies, but have not suggested an alternative textual basis for judicial intervention in these cases. This Note offers a potential solution in the Guarantee Clause. It argues that the Clause embodies a promise of popular sovereignty in the states. I contend that the Guarantee Clause can and should be revived to unburden the courts from the deficiencies of existing doctrine and provide a textual basis for addressing the problems of political malfunction.

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