Mutual Recognition in International Finance

In recent years, scholars have devoted considerable attention to transnational networks of financial regulators and their efforts to develop uniform standards and best practices. These networks, however, coexist with an emerging trend toward regional and bilateral mutual recognition arrangements. This Article proposes a theoretical account of mutual recognition that identifies its potential benefits, the cooperation problems it raises, and the resulting institutional frameworks in multilateral and bilateral settings. The multilateral model adopted in Europe relies on extensive delegation to supranational institutions, crossissue linkages, and political checks on delegation. An alternative bilateral model, illustrated by the recent arrangement between the SEC and Australia, relies on selective membership, bilateral enforcement, and limited duration and renegotiation clauses. The multilateral model is unlikely to be effective without strong, preexisting supranational institutions—in other words, outside Europe. Therefore, international efforts at mutual recognition are more likely to resemble the SEC’s program. This bilateral model, however, is most likely to succeed between jurisdictions with developed financial markets as well as similar regulatory objectives and resources. It also requires sufficient private demand and enhanced cross-border supervision and enforcement agreements. Finally, it is less likely to be effective where one country seeks to improve regulatory standards in the other. These insights are relevant for other contemporary mutual recognition initiatives, such as between Europe and third countries and within ASEAN.

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