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Reengineering Financial Market Infrastructure

By David A. Wishnick. Full Text.

Scholars often portray financial regulators as eternal followers of the private sector, ever struggling to “keep pace” with technological change. But the image of the reactive, pace-keeping regulator obscures as much as it reveals. This Article challenges the conventional depiction by highlighting regulatory efforts to reengineer the infrastructure of financial markets—the trading platforms, payment networks, settlement systems, and data repositories—that enable market participants to transact.

By presenting and evaluating cases involving the Securities and Exchange Commission, Federal Reserve, and Commodity Futures Trading Commission, this article reveals an underappreciated rationale for regulatory efforts to reengineer market infrastructure. Specifically, these efforts enable technocrats to obtain a distinctive form of control over financial activity—one that legal theorists working in other contexts characterize as “architectural regulation.” In the same way that speed bumps, door locks, and prison panopticons regulate behavior, so too do the design elements embedded in market infrastructure. For instance, changes to market infrastructure design have enabled financial regulators to prevent securities theft, better monitor trading behavior, and eliminate once-fearsome sources of systemic risk.

Drawing upon this history, this Article examines prospects for infrastructural reengineering today. It evaluates the strengths and weaknesses of the practice in comparison with other more common techniques of financial regulation, and it recommends efforts that regulators should prioritize. Finally, this Article advocates a broader rethinking of the government’s role in renovating the technical systems underlying the financial markets.