Chapter 6

Legal Framework of the World Markets

Much of our U.S. and EU legal traditions have been exported to or adopted in the global securities markets, so a high-level understanding of U.S. laws and EU Directives is desirable. Before delving into more specifics of securities regulation in the United States and EU, it is worth pausing to reflect on why governments regulate the capital markets at all.

It has long been recognized that the free flow of capital and credit creates a multiplier effect on a nation's economy, so governments recognize that it is important that financial services firms do not fail. Moreover, the major financial services players—banks, insurance companies, pension funds, investment funds—all have one thing in common, namely, that they take in deposits (or premiums or contributions in the case of insurance companies and pension funds, respectively) not knowing with certainty when they will have to pay funds out. Consequently, financial services firms are highly regulated for two purposes. First, regulation is for the good of the economy so that credit can flow freely, and second, so that financial services firms do not fail and harm their depositors or pensioners or investors. It is this dual purpose that makes financial services regulation unique.1

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