Economic Regulation Issues November 2008

Agencies Issue Final Internet Gambling Regulations
International law Office, November 28 2008

Transform Oil and Gas Exploration and Production
International Law Office, November 24, 2008

A new architecture for global financial regulation
Financial Times, November 19, 2008

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Agencies Issue Final Internet Gambling Regulations
International law Office, November 28 2008

The Board of Governors of the Federal Reserve System and the Department of Treasury issued a final regulation on November 12, 2008 implementing key portions of the Unlawful Internet Gambling Enforcement Act of 2006. The regulations, which will affect many financial institutions and payment processors, become effective on January 19 2009, although compliance is not required until December 1 2009.

The new rule designates automated clearing house systems, card systems, cheque collection systems, money transmitting businesses and wire transfer systems as covered payment systems. It then exempts certain participants in those payment systems from the rule, and reiterates the general requirement that “non-exempt participants establish and implement written policies and procedures reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions”.

The rule allows an entity to rely on the policies and procedures of a designated payment system if the system’s policies and procedures comply with the rule. A participant may rely on a system’s representation of compliance with the rule unless the participant is told otherwise by its regulator.

The rule also imposes obligations not only on certain financial institutions and payment systems, but also on third-party processors. The rule provides a detailed definition of a ‘third-party processor’, but the agencies note that a service provider simply providing ‘back-office support’ to a depositary institution is not a third-party processor under the rule.

The act and the rule are subject to enforcement solely through federal administrative enforcement. The rule also reiterates the act’s liability protections with respect to ‘overblocking’ transactions that may not be restricted transactions. Furthermore, neither the act nor the rule requires any entity to process any transaction, legal or otherwise.

Transform Oil and Gas Exploration and Production
International Law Office, November 24, 2008

After several months of debate, Mexico's energy reform has been approved by the Senate and the House of Representatives. The eight federal statues implementing it are expected to be enacted shortly. The reform focuses on the oil and gas industry - particularly the role and organization of Pemex, the state-owned oil and gas company - but also covers renewable energy projects.

Mexico has never had an upstream authority and Pemex, as the sole exploration and production operator, has been subject to limited supervision in these areas. Except in the electricity sector, no long-term or medium-term energy policy or planning strategy has been applied; rather, decisions on projects have been based largely on the Ministry of Finance's assessments of the likely short-term revenues. This has resulted in dramatic decreases in reserves and a consequent steep decline in the output of the main production fields. The latest structural changes will reshape the oil and gas industry's framework and facilitate the implementation of further reform.

The secretary for energy has been given broader authority to regulate Pemex and the energy industry in general, particularly with respect to the oil and gas industry and energy planning and policy.

A National Energy Council, presided over by the secretary for energy, will be established to represent all federal agencies and public entities that are directly involved in the industry, including Pemex, the Federal Electricity Commission, the Energy Regulatory Commission, the National Water Commission and Central Light and Power. The council will be charged with preparing and implementing a 15-year national energy plan, to be resubmitted for ratification to Congress every February; the first plan is due for submission in 2010. A consultative committee will allow private-sector entities and others to participate in the council's work.

A new architecture for global financial regulation
Financial Times, November 19, 2008

At the G20 summit in Washington this month, it was agreed that global growth will require sound new global regulation of financial markets. But what would it take to achieve such regulation?

The summit offered few answers. We argue that nothing less than a new global architecture for the regulation of banking and finance is required to ensure success. Such architecture comprises three elements: broad representation in the rule-making process, proper monitoring, and systematic enforcement.

First, a better and more impartially-informed process for setting the rules is required. The existing rules were written by the Basel Committee on Banking Regulation which comprises officials from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the UK and the US.

They were wrongly persuaded by banks that complex derivative instruments could improve risk management and distribution as well as enhance market efficiency and resilience.

Indeed, the financial sector argues its case extremely effectively. Recall how quickly and effectively their July 2008 report argued against any new or further regulation by detailing instead “best practice reforms” for the industry. Regulators who resist the finance industry’s well-honed case have been accused of stupidity, incompetence, and over-zealousness by those whose profits and personal gains are at risk by new rules.

Effective new regulation thus requires participation by a broader range of countries and stakeholders in rule-making. The recent crisis shows that some of the costs of poor regulation fall on emerging and other economies whose voice would add a different and balancing set of stakes into rule-making. Equally important is the range of agencies involved in rule-making.

A second requirement of a new architecture is robust monitoring of regulators and those they regulate. New global rules – once agreed upon – need to be implemented and obeyed in the face of well-organized and richly-resourced firms and groups who try to avoid this.

A third essential element of the new architecture is the creation of a special-function international judicial institution charged with assisting the enforcement of the new rules in banking and finance, adjudicating disputes, and offering uniform authoritative interpretations of the rules.

It is clear now that an urgent need exists for a new architecture at the international level. This will not remedy all failings at the national level, but it could create powerful incentives for effective regulation within countries.

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