Games Commissions Play: 2x2 Games of International Securities Regulation

Abstract

In recent years, the internationalization of securities markets has accelerated in pace and broadened in scope Faced with the growing complexity of modern stock markets, national securities regulators have recognized the need for greater cooperation, and a variety of efforts to achieve international cooperation in securities regulation is currently under way. The reality of today's stock markets, however, is one of fierce international competition, and securities regulators thus face two problems in the international context. The first is the fundamental incentive not to cooperate with their colleagues to the extent that such cooperation might undermine their country's competitive position in the international markets. The second problem is that adhering to the competitive dynamics may, in fact, operate to the detriment of their country's interests. This situation is often characterized in the form of a Prisoners' Dilemma. This Article suggests a new, broader perspective for looking at international securities regulation. It argues that in analyzing international securities regulation, the Prisoners' Dilemma is a useful paradigm in only a few of the problems that arise in practice. In many others, other 2x2 game models better depict the conflictual situation that countries face and help to assess the prospects of international cooperation. The Article offers a unique integration of insights coming from three different sources: theories of corporate governance and securities regulation, standard game theory modeling, and international relations and regime theory analysis. The Article examines three fundamental subjects of securities regulation-disclosure, anti-fraud, and insider trading-and transforms states' policies into ordinal preference orders in 2x2 games. The emphasis throughout is on regulatory cooperation-on the problems securities regulators face in reaching sustainable agreement and on the international regimes that may facilitate cooperation.