Академический Документы
Профессиональный Документы
Культура Документы
Finance
Unit 1 Introduction to the Law of
International Finance
Contents
Unit Content 2
Learning Outcomes 2
1.1 Introduction 3
Unit Content
Welcome to this course on the legal aspects of international finance. The
course has no specific introductory section because Unit 1 is intended to
serve as an introduction to the topics you will study in the rest of the course.
This unit offers a primer on the global financial market, the various financial
assets and types of financial flows across borders, examines the concept of
legal risk and the need for international legal principles and contracts
governing the flow of capital across borders, and it also looks at various
types of financial flows. In studying it, you will learn about different types
of international financial assets and cross-border capital flows, and you
should be well prepared for studying the following units, where all these
issues are examined in detail.
At the end of this unit we provide some advice about the course assessment
and include the Specimen Examination Paper.
Learning Outcomes
When you have completed your study of this unit and its readings, you will
be able to
• identify the various types of financial assets and cross-border financial
flows
• distinguish between domestic and international financial transactions
and identify the main characteristics of international financial
contracts
• identify and discuss the difference between a choice of law clause and
a jurisdiction clause in a contract
• identify the various categories of legal and political risk relating to
international financial transactions and explain how lenders and
borrowers manage those risks.
2 University of London
Unit 1 Introduction to the Law of International Finance
1.1 Introduction
The Financial Law course discusses the various ways in which the financial
needs of commercial undertakings and private individuals alike are met by
legal structures created by the jurisdiction in which they operate. English
law is used as a model, but the principles may be applied to any legal
jurisdiction, save that the intervention of the state may be greater in some
jurisdictions than others. The principles learned in the Financial Law course
mainly apply where the financial transactions concerned operate within one
jurisdiction.
However, more and more, commerce has become international in nature. As
international commerce has grown, so the law must adapt to keep pace with
it. This is the focus of Legal Aspects of International Finance.
The financial sector consists of many types of activities, institutions and
markets. The notions of international finance and international financial
market encompass the totality of those activities and markets.
As you know, financial markets facilitate the transfer of financial assets – i.e.
the transfer of funds from those who have surplus funds to invest (‘savers’
or ‘investors’) to those whose spending exceeds or is going to exceed their
income and therefore need additional funds to invest in tangible assets or
finance their current operations or even consume (‘borrowers’). Companies
borrowing money in the international syndicated loan markets, individuals
borrowing to finance the acquisition of residential property or governments
borrowing to finance their public spending are all ‘borrowers’ and rely on
borrowed funds from domestic and international financial markets.
This flow of funds from ‘savers’ or ‘investors’ to ‘borrowers’ is made possi-
ble by the activities of financial intermediaries and financial markets such as
securities brokers, commercial banks, investment banks etc. Regarding the
mode of financial flows, funds flow from ‘savers’ to ‘borrowers’ either
directly or via the operations of a financial intermediary.
In the first case, ‘borrowers’ receive funds directly from ‘savers’. In return,
‘savers’ acquire debt, equity or mixed-type claims in the form of primary
securities. Financial intermediaries facilitate this process, assisting in the
design, marketing and completion of the transaction. These financial in-
struments are marketable in secondary markets.
In intermediated flows, financial intermediaries engage in the business of
receiving funds from ‘savers’ and lending funds to ‘borrowers’. The flow of
funds from intermediaries to ‘borrowers’ occurs either in the form of direct
financial accommodation or by means of purchasing from borrowers pri-
mary debt, equity or mixed-type securities.
The ultimate objective and benchmark of international finance is the undis-
turbed flow of funds from ‘savers’ to ‘borrowers’ regardless of national
borders. When a South African cement company desires to raise 400
million in the European markets to fund the acquisition of plant or equip-
ment, the company may borrow the funds from an international bank
4 University of London
Unit 1 Introduction to the Law of International Finance
appreciate, however, that there is a limit to the similarities of the two loans.
The reality is that a domestic loan by a UK bank to a UK borrower is, from a
legal and financial perspective, also very different from a cross-border loan
by a syndicate of banks to an Indonesian person. The fact that the loan
involves parties in two different countries, involving two, or perhaps more,
different legal systems raises a range of issues that purely domestic transac-
tions do not have to resolve. The international aspects of legal issues relating
to cross-border financial transactions such as loans or bond offerings will be
the subject matter of this course.
1
See the McKinsey Global Institute MGI, Mapping the Global Capital Markets: Fourth Annual
Report (January 2008), publicly available online, cited in the References at the end of the unit.
percent, to reach $74.5 trillion. Foreign investors own one in three govern-
ment bonds around the world, up from just one in nine in 1990.
The foreign assets of all banks reporting to the Bank for International Set-
tlements – which include loans given to nonresidents and booked by the
bank’s headquarters and loans booked in branches or subsidiaries abroad –
totaled more than 17 trillion dollars at the end of June 2004 and continue to
grow. International financial flows in the form of debt and equity securities
have followed a similar trend of rapid expansion in the last 25 years. In the
G-7 countries, sales and purchases of bonds and equities between residents
and nonresidents rose steadily from almost zero in 1975 to 230 percent of
GDP in the United States, 334 percent in Germany, 415 percent in France,
640 percent in Italy and 331 percent in Canada by 1998.
By the end of 2004, international equity offerings (i.e. the raising of capital
by offering shares to nonresidents) totaled $120 billions a year. An estimated
10 percent of international equity finance is directed to a small group of
emerging economies, with the remaining 90 percent flowing to businesses in
developed countries. Generally, the total value of cross-border transactions
in equity securities is a small fraction of the value of purely domestic equity
investment. Equity investors prefer to invest at home. This so-called ‘home
bias’ puzzle is one of the major research questions in international finance.
6 University of London
Unit 1 Introduction to the Law of International Finance
shares of common stock may be issued without the typical voting rights
being included, for instance, or some shares may have special rights unique
to them and be issued only to certain parties. Note that not all equity shares
are the same.
In addition to voting rights, holders of shares of common stock have the
right to share in distributions of the company’s income, the right to purchase
new shares issued by the company, and the right to a company’s assets
during a liquidation of the company.
As part of international finance, international equity finance involves the
issuance and sale of shares of common stock to nonresidents. For example, a
Greek corporation with shares listed on the Athens Stock Exchange decides
to raise equity finance abroad and conducts marketing activities in view of
selling some of its shares to institutional investors such as insurance
companies and pension funds in the United States. As a result of its
marketing activities, the Greek company manages to sell approximately 10%
of its common stock to investors in the United States who, as a result of their
investment, have now become the company’s shareholders. Stock exchanges
where equity securities are listed have greatly facilitated the purchase of
equity securities by nonresident investors in international equity financings.
A stock exchange is an organisation that provides a marketplace for either
physical or virtual trading of shares, bonds and warrants and other financial
products where investors (represented by stock brokers) may buy and sell
shares of a wide range of companies. A company will usually list its shares
by satisfying and maintaining the listing requirements of a particular stock
exchange.
Many large companies choose to list on several major exchanges within and
outside their home country in order to broaden their investor base. Regard-
less of the location of the shareholder, the legal rights and duties of
shareholder are governed by the law of the country of incorporation of the
company and its articles of association. Nevertheless, foreign shareholders
encounter several legal risks and issues including those of tax of foreign
equity investments, transfer restrictions, issues with voting rights etc.
Make sure your notes cover the various reasons he advances as to why this state of
affairs is currently not possible.
8 University of London
Unit 1 Introduction to the Law of International Finance
often, while specifying the governing law, state that any dispute is to be
resolved by arbitration. In place of the usual jurisdiction clause, an interna-
tionally recognised arbitration centre will then be nominated, such as
London or Paris.
The choice of law is not merely a matter of convenience and clarity: certain
causes of action recognised in one legal system may simply not exist in
another. For example, the ‘requirement of consideration’, an important
principle of English contract law, does not exist in Scots law. Similarly, the
purpose of the contract may be illegal in certain jurisdictions (but not
others): examples include gambling and the sale of alcohol. If the purpose of
the contract is viewed by one jurisdiction’s law as illegal, that law is likely
not to enforce any rights or obligations arising under it.
This whole area, termed conflicts of laws, is covered in detail in Unit 8. The
following examples show further ways in which international complexities
relating to finance need legal clarification.
Major loans for a large-scale corporate project may be too large for one
financial institution on its own to provide. Examples are: a major tunnel
such as the Channel Tunnel linking the United Kingdom and France, the
building of a new airport, possibly even the setting up of a new airline.
Several financial institutions may therefore come together to provide be-
tween them the amount of funds required. In some cases, it may be possible
for all the institutions to be found within one jurisdiction but, frequently,
they will be drawn from a number of major financial centres, such as Eng-
land, New York and Singapore. The law relating to such loans needs to be
flexible in order to deal with this.
It is now common for shares of international companies to be traded on
more than one exchange in more than one jurisdiction – for example, on
both the London and the New York Stock Exchanges. Similarly, companies
in smaller or developing commercial centres may wish their shares also to be
listed on a more established market in order to access a wider range of
investors: shares in the growing Chinese corporate sector are increasingly
listed not only in Shanghai, but also on the Hong Kong Stock Exchange, with
its different rules and legal system. The same is also true of debt securities:
these, too, may be traded internationally. A legal framework is required so
that securities can easily be traded globally with a minimum of barriers from
different legal systems.
What distinguishes international finance from domestic finance are pri-
marily two key elements: the jurisdictions in which the borrower and lender
are located and the currency in which the credit is offered. Domestic markets
serve borrowers located in the same jurisdiction as the lender. The currency
of the loan will typically be that of the jurisdiction in question, although in
some cases an alternative currency may be agreed on as being more stable.
International markets are precisely that: markets that offer credit both to
borrowers located in the same jurisdiction as the lender and to those in other
jurisdictions. They are generally found in the large financial centres, such as
the United States, the UK, Germany, Hong Kong and Japan.
10 University of London
Unit 1 Introduction to the Law of International Finance
1.6 Conclusion
This unit has covered in brief several topics important in international
finance, and it has served as an introduction to the rest of the course, which
considers those topics in detail. You should now be able to complete the
learning suggestions set out on the introductory page; if not, you should
return to the relevant section and be sure you do understand the concepts
before going on to study Unit 2.
Here are the questions implied in the unit’s learning outcomes:
• What are the various types of financial assets and cross-border
financial flows?
• What are the main characteristics of international financial
transactions compared to purely domestic transactions?
• What is the function of the choice of law and jurisdiction clauses in
international financial agreements?
• What are the various categories of risk relating to international
financial transactions?
12 University of London
Unit 1 Introduction to the Law of International Finance
1.7 Assessment
Your performance on each course is assessed through two written
assignments and one examination. The assignments are written after
week four and eight of the course session and the examination is written
at a local examination centre in October.
The assignment questions contain fairly detailed guidance about what is
required. All assignment answers are limited to 2,500 words and are marked
using marking guidelines. When you receive your grade it is accompanied
by comments on your paper, including advice about how you might im-
prove, and any clarifications about matters you may not have understood.
These comments are designed to help you master the subject and to improve
your skills as you progress through your programme.
The written examinations are ‘unseen’ (you will only see the paper in the
exam centre) and written by hand, over a three hour period. We advise that
you practice writing exams in these conditions as part of you examination
preparation, as it is not something you would normally do.
You are not allowed to take in books or notes to the exam room. This means
that you need to revise thoroughly in preparation for each exam. This is
especially important if you have completed the course in the early part of
the year, or in a previous year.
Definitions
Some questions mainly require you to show that you have learned some concepts, by
setting out their precise meaning. Such questions are likely to be preliminary and be
supplemented by more analytical questions. Generally ‘Pass marks’ are awarded if the
answer only contains definitions. They will contain words such as:
Describe
Define
Examine
Distinguish between
Compare
Contrast
Write notes on
Outline
What is meant by
List
Reasoning
Other questions are designed to test your reasoning, by explaining cause and effect.
Convincing explanations generally carry additional marks to basic definitions. They will
include words such as:
Interpret
Explain
What conditions influence
What are the consequences of
What are the implications of
Judgment
Others ask you to make a judgment, perhaps of a policy or of a course of action. They will
include words like:
Evaluate
Critically examine
Assess
Do you agree that
To what extent does
Calculation
Sometimes, you are asked to make a calculation, using a specified technique, where the
question begins:
Use indifference curve analysis to
Using any economic model you know
Calculate the standard deviation
Test whether
It is most likely that questions that ask you to make a calculation will also ask for an
application of the result, or an interpretation.
Advice
Other questions ask you to provide advice in a particular situation. This applies to law
questions and to policy papers where advice is asked in relation to a policy problem. Your
advice should be based on relevant law, principles, evidence of what actions are likely to
be effective.
Advise
Provide advice on
Explain how you would advise
14 University of London
Unit 1 Introduction to the Law of International Finance
Critique
In many cases the question will include the word ‘critically’. This means that you are
expected to look at the question from at least two points of view, offering a critique of
each view and your judgment. You are expected to be critical of what you have read.
The questions may begin
Critically analyse
Critically consider
Critically assess
Critically discuss the argument that
Examine by argument
Questions that begin with ‘discuss’ are similar – they ask you to examine by argument, to
debate and give reasons for and against a variety of options, for example
Discuss the advantages and disadvantages of
Discuss this statement
Discuss the view that
Discuss the arguments and debates concerning
Further information
The OSC will have documentation and information on each year’s
examination registration and administration process. If you still have
questions, both academics and administrators are available to answer
queries.
The Regulations are also available at
,
setting out the rules by which exams are governed.
16 University of London
Unit 1 Introduction to the Law of International Finance
UNIVERSITY OF LONDON
Centre for Financial and Management Studies
MSc Examination
Postgraduate Diploma Examination
for External Students 91DFM C241
91DFM C341
This is a specimen examination paper designed to show you the type of examination
you will have at the end of the year for Legal Aspects of International Finance.
The number of questions and the structure of the examination will be the same as on
this one, but the wording and the requirements of each question will be different.
Best wishes for success on your final examination.
You have THREE hours to complete the examination.
You must answer THREE questions. Answer at least ONE question from
Section A. The remaining two questions may be chosen from either Section A
or Section B.
You must answer THREE questions. Answer at least ONE question from
Section A. The remaining two questions may be chosen from either Section A
or Section B.
Section A
(Answer at least ONE question from this section)
18 University of London
Unit 1 Introduction to the Law of International Finance
Section B
[END OF EXAMINATION]
20 University of London