M Konrad Borowicz

Assistant Professor

of Financial Innovation and Regulation, Tilburg University

LAW AND THE INDUSTRIAL ORGANIZATION OF FINANCIAL MARKETS

Loan underwriting standards and market efficiency

Work in progress

In recent years, the terms of lending in the leveraged market have been generous to corporate borrowers, both in price and non-price terms. To many commentators this development suggests that borrowers do not compensate lenders adequately for the risks that lenders are taking on or, alternatively, that lenders are taking on excessive risks. This article proposes an original policy solution to the erosion of underwriting standards in corporate lending. The solution is focused on improving the speed with which loan prices in the secondary market incorporate information about the quality of the underwritten terms. This article argues that in efficient secondary markets, activist investors incorporate information about the erosion of the quality of the underwritten terms into loan prices, thereby correcting mispricing in primary markets and contributing to the tightening of the terms subsequently offered in primary markets. Antitrust law can foster loan market efficiency by policing market participants' efforts to restrict activist loan market investors from accessing information in the loan market.

Contracts as regulation: the ISDA Master Agreement

Capital Markets Law Journal

This article proposes a rule of contractual interpretation for regulatory contracts defined as contracts 1) used by a large number of market participants, 2) subject to limitations on deviation, and 3) designed with market problems (such as negative externalities) in addition to transactional problems (such as transaction costs) in mind. The rule states that the outcome of the interpretation of regulatory contracts must not be inconsistent with the objectives of the regulatory framework applicable to the market in which the contract is used. The article suggests that the reliance on that rule is normatively justified in cases where the regulatory objectives are clearly defined and particularly when the alternative outcome is to void the contract or its provision. By adopting the regulatory rule for contract interpretation, courts can preserve the autonomy of private regulatory regimes created through contracts without sacrificing public policy objectives. Several examples of the application of the rule to the interpretation of selected provisions of the ISDA Master Agreement and the ISDA Credit Definitions are discussed.