Making markets, making laws: non-deliverable currency forwards and the Amendment to Article 1062 of the Russian Civil Code

Abstract

Being a part of social studies of finance, i.e. a perspective that, in its narrow sense, investigates the role of science and technology in financial markets, the thesis suggests that one can understand science in a wider sense, as an expert knowledge domain. The social studies of finance, then, can be broadened out to encompass the different ways in which expert knowledge shapes financial practices. Legal expertise is another instantiation of expert knowledge in the sense that both (science and law) are different forms of power; therefore this research aims at answering the question how finance is shaped by legal expert knowledge. The study employs the method of ‘opening the black box’ of regulation, and thus it argues that technicalities of regulation, which embody legal expertise, are crucial for the construction of financial markets. The thesis demonstrates how ‘just’ a concise amendment to Article 1062 of the Russian Civil Code has had significant ramifications for the interbank USD/RUB cash-settled forward market, and explores the controversies involved in and details of the law making process. The amendment was made in 2007 and changed the legal status of non-deliverable forwards, which had been classified by Russian courts as gambling transactions under Russian law in 1998-1999. Based on the evidence obtained from the study of the legal developments that resulted in the amendment, the thesis shows that the politics of the law-making process, as well as shaping the outcome, can in equal measure be disruptive and result in a delay in legal changes that market participants felt were much-needed. After almost a decade of painstaking negotiations, the amendment stated that cashsettled derivatives are legally enforceable under the Russian law. It rendered cash-settled forwards legally secure, hence encouraged cross-border transactions and enhanced the market’s liquidity; it is also made possible the introduction of netting as a risk management tool in the market. The contested, long-delayed amendment is thus an example of a pervasive process: the constitutive role of law (including esoteric law, little noticed outside of specialist spheres) in shaping markets.