Authors

Raj Bhala

Abstract

In a global electronic market the role of trade usages must be reinvigorated to better suit the needs of market participants. Contrary to the approach to trade usages often adopted by courts and scholars, usages should not be seen as merely a device to interpret disputed terms in a contract. Rather, they should be viewed as a legal foundation for existing and new trade practices and, therefore, as a source of authority for and legal obligation arising from such practices. In sum, they should be regarded as a means by which participants in global eiectronic markets can engage in self-regulation. The world's largest financial market, the global currency bazaar, is an outstanding case study of the need to reinvigorate trade usages in a cross-border, high-technology market. In brokered foreign currency transactions, a practice called "switches" lacks a legal foundation. In a switch, one bank attempts to rescind a foreign exchange contract because the counterparty to that contract is an undesirable credit risk exposure. The bank further attempts to conclude a new contract with a different counterparty on the same terms and conditions as the first contract. By switching counterparties, the bank seeks to expunge the undesirable credit risk, and preserve the benefits of the initial contract. However, whether a switch is legally permissible, and whether it effectively rescinds one contract and creates another, is uncertain. By reinvigorating the concept of a trade usage and recognizing a switch as a reinvigorated usage, a legal foundation for it would exist. Banks trading foreign exchange would then be able to regulate their credit risk exposures by switching counterparties. Indeed, to address concerns of government regulators, it is proposed that banks further refine this practice by developing a five-minute right of rescission usage. For three reasons, self-regulation through reinvigorated trade usages is needed. First, it has several advantages. It will reduce uncertainty, protect expectations, provide flexibility, and promote efficiency. Second, alternative legal foundations-namely, rule-based regulation through contract rules on assignment and adequate assurances of performance-may exacerbate uncertainties and not represent a Pareto improvement. Third, the process of domestic and international contract law reform cannot anticipate and meet the needs of banks in the global currency bazaar regarding credit risk. This process is reactive and cumbersome. Business usage may . . . provide a way of doing business without the aid of law

Document Type

Article

Publication Information

31 Idaho Law Review 863-936 (1995)

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