This paper deals with the debate on the methods to regulate hedge funds, with a particular focus on direct or indirect regulation. After having briefly examined the pros and the cons of directly regulating these investment schemes, it comes to the conclusion (largely shared by most scholars) that hedge funds should not be directly regulated, while regulation should concern their management companies and, most of all, their counterparts (lenders in the first place) with a view to managing systemic risk. In addition, regulation should also set precise thresholds for access which should aim at protecting unsophisticated investors from hazardous moves, without, however, falling into the trap of regulating hedge fund themselves.

The attention is then turned to the European Union and to its Alternative Investment Fund Managers Directive (AIFMD). An analysis is conducted on some of the most significant approaches to hedge fund regulation which have fuelled (and are partly still fuelling) the debate within EU institutions in its struggle to provide Member States with a valid response to the financial crisis, and on some key provisions of the first level AIFMD. In this light the author concludes that, despite the declared intent to regulated fund managers, the directive often seems to regulate hedge fund themselves. This does not seem to be in line with the thoughts of most scholars and market operators on hedge fund regulation and also looks at odds with other pieces of EU legislation (in particular with the so-called “Newcits”).

In Europe, debate as to whether one should regulate chemicals based on intrinsic hazard or assessment of risk, or possibly a combination of both, has been gaining momentum. This article first provides a brief history of this risk versus hazard debate. Secondly, it examines how European regulators are currently handling the regulation of two chemical compounds, namely Bisphenol A and Deca BDE (a brominated flame retardant), based on forty-five expert interviews with regulators, policy makers and industry representatives in eight Member States, as well as with European Commission officials. The paper shows that there is no clear consensus as to when risk or hazard considerations should be the basis for regulatory decision-making, with wide discrepancies between Member States (e.g. the UK is overall more risk based than Sweden) and between regulatory agencies within Member States. The penultimate section puts forward a series of recommendations to help regulators and policy makers develop more consistent and science based regulations for Europe.

As its name suggests, the EJRR focuses on risk regulation by privileging a European perspective. This issue does not intend to depart from this characterizing feature of the journal. What would make it “special” then? The “specialty” has to be found in the type of risk which our authors deal with in their articles contributing to the symposium: the one posed by, and intrinsic to, financial markets, with a particular view to the recent (better said, current?) financial crisis.

In the last twenty months, the Obama Administration has been taking an approach to regulation that is distinctive in three ways.

First, we have approached regulatory problems not with dogma or guesswork, but with the best available evidence of how people really behave.

Second, we have used cost-benefit analysis in a highly disciplined way, not to reduce difficult questions to problems of arithmetic, but as a pragmatic tool for cataloguing, assessing, reassessing, and publicizing the human consequences of regulation – and for obtaining public comment on our analysis. This emphasis on human consequences – on reducing or eliminating unjustified burdens on the private sector and on ensuring that high costs are justified by high benefits – is especially important in a period of economic difficulty. We have worked to put into place important safeguards while also making regulation compatible with the economic recovery, and while reducing the risk that costly regulations will have adverse effects on job creation, wages, prices, and economic growth as a whole.

On 8 October 2010, the European Commission issued a communication paper on Smart Regulation in the European Union. The paper reports on progress made, future priorities and strategy in the field of regulatory reform, for the information of interested outsiders. It is the latest in a series of such communications, issued on a regular basis since the first major, systematic action plan in 2002.

However, this most recent communication comes at a time when the context has changed noticeably. First, the financial crisis sparked by the credit crunch has altered attitudes to regulation. More attention is now being paid to the effectiveness of regulation and its overall quality than before. The Communication acknowledges this and underlines that regulation is essential to ensure that markets deliver sustainable prosperity for all. Second, a number of the Commission’s tools have been in place for some time, allowing it to draw useful lessons from its own experiences as well as from those of other countries. Its impact assessment system recently underwent a major examination by the European Court of Auditors.

This article assesses the impact of the global economic crisis on the European Union and analyzes the recently enacted and future legislative response to repair the EU financial sector. It closely discusses and critiques the main initial response legislation, the European Economic Recovery Plan, finding that the central regulation contained short-term measures, yet managed to remain within the EU's long-term goals. The article also closely examines the significant risk regulation considerations highlighted by the economic crisis, notably those considerations contained in the De Larosiere Report and the Basel III Framework, and discusses the importance of implementing financial risk regulations to stabilize and revitalize the EU financial sector. Ultimately, the article concludes that the EU's recently enacted legislative measures are consistent with, but also must continue in tandem with, the longterm policies of the EU, while including new and crucial financial risk regulatory measures.

In the wake of the global financial crisis, the trajectory of legal reforms is likely to turn towards more transparency regulation. This article argues that transparency regulation will take on a new role of surveillance as intelligence and data mining expand in the wholesale financial sector, supporting the creation of designated systemic risk oversight regulators.

The role of market discipline, which has been acknowledged to be weak leading up to the financial crisis, is likely to be eclipsed by a more technocratic governance in the financial sector. In this article, however, concerns are raised about the expansion of technocratic surveillance and whether financial sector participants would internalise the discipline of regulatory control. Certain endemic features of the financial sector will pose challenges for financial regulation even in the surveillance age.

When called upon to regulate risk, the EU carries the threefold onus to (i) protect its people(s); (ii) ensure the functioning of the internal market; and also (iii) to allocate the resources available wisely and efficiently.

This creates a number of pressures and dilemmas for the EU, notably for the Commission when initiating legislation and for the EP and the Council when co-legislating.

According to a familiar script – faithfully narrated by Ragnar Lofstedt in his opening article –, the EU has, in recent years, been subscribing to a progressive ideal of regulation based on evidence. As a result, by making a commitment to the use of optimization tools, such as risk assessment and regulatory impact assessment, the EU has been gradually developing a European risk regulation model that seems to put the EU at the forefront of a wider move towards evidence-based policy-making. Given the historical affection of the EU integration process to technocratic modes of governance, this choice is not surprising.

The view that risks and hazards are distinct concepts is commonly held in the scholarly literature on risk especially in the English-speaking community. The dichotomy is also enshrined in key documents commissioned or developed by Governments to help regulators conceptualise, regulate and communicate harmful events. Yet, the implications of risk-based versus hazard-based regulations have often been overlooked. Scholars have only conducted limited discussions, in contrast to the extensive debates about the respective merits of evidence-based and precautionary-based regulation. Lofstedt's article “Risk versus Hazard – How to Regulate in the 21st Century” offers a new and important perspective on the relationship between science and regulatory decisions. Lofstedt essentially argues that the conceptual distinction between hazards (the potential for a substance, activity or process to cause harm or adverse effect) and risks (a combination of likelihood and the severity of a substance, activity or process to cause harm) presents a meaningful classification to analyse regulations.

The article depicts the general framework in which the regulatory bodies in financial sector have been operating. After an introductory outline of the financial system and its objectives, the analysis shifts to the framework of the financial business operators and of the regulatory bodies. The market is organised and fragmented in financial conglomerates, where cross activities take place and where potentially it is easier for the regulatory bodies to exercise their control. In this context, the different models of supervision will be scrutinised, together with the attempts, made at European level, to comply with the international standards. The final part is dedicated to the description of global dynamics and to the current situation to overcome the systemic crisis affecting the market. With some –bitter – concluding remarks we will try to prospect possible different solutions to the crisis, solutions that don't necessarily coincide with the actual decisions to reform the system taken at European level.

On Tuesday, January 18, 2011 President Obama issued a new executive order and two somewhat related memoranda which embody some of the principles discussed by the Office of Information and Regulatory Affairs (OIRA) Administrator Cass Sunstein in this Journal. Building on three decades worth of practice in the United States with regulatory review, the new order and memoranda maintain significant continuity with past experience, while emphasizing both “humanizing” and rationalizing elements in the practice of regulatory impact analysis.

Modern financial law historically emerged as a patchwork of regulatory reactions to a series of financial crises. It continued to develop in sync with the ebb and flow of regulatory cycles that oscillated between periods of calm, conducive to a deregulatory frenzy, and periods of crises followed by re-regulatory fervour. Reform initiatives spurring in reaction to crises also comprise procedural/institutional reforms (i.e. those relating to the “who” and “how” of regulation, as opposed to the “what”). The latest financial crisis is no exception to this rule. This article focuses on the EU institutional reforms, which arguably represent a more radical departure from the status quo (in comparison to domestic or international initiatives) in that they involve an instance of “proper” institution-building with implications across different levels of governance. This reform is examined first against the backdrop of the existing EU agencies' legal framework and is found to constitute an important milestone in the crystallization of this framework. A closer look is then taken at the new European Supervisory Authorities' role in EU rulemaking, and to their relationship with the European Commission. Subsequently, the paper takes a further step back and offers some thoughts about the continuously mutating relationship between law and new governance practices, as illustrated in the context of EU financial regulation.

The debate as to whether chemicals should be regulated according to hazard or risk is once again under the spotlight, this time commented by Ragnar Lofstedt, PhD, Professor and Director of the Kings Centre for Risk Management at Kings College in London. He takes the reader through the history of risk assessment and chemical control, presents two interesting current case studies and sheds light on the influence of politics on the implementation of regulation.

Professor Lofstedt's assumption that two different methods of assessment exist is not a complete statement. In fact this is a confusing way to describe the scientific and political processes involved in regulation. It is not a choice between two methods, but rather a balance between political ambition and scientific facts within one method. Examples can be found where science has been more influential than policy on the actual regulatory decision, and vice versa.

This article focuses on misaligned incentives in the lending process caused by the shift from the traditional relationship banking model to a more transaction-oriented ‘originateto-distribute’ model of bank finance as one of the major factors contributing to the financial crisis of the years 2007–2009. Based on a theoretical analysis of banks as financial intermediaries and the agency costs involved if banks distribute assets they have created to other parties in the financial system, empirical studies are reviewed which demonstrate that market mechanisms apparently contain these agency costs in loan syndications and loan sales, but failed to do so in securitisations during the years before the onset of the financial crisis. The EU has already reacted to this breakdown of market mechanisms by an amendment to the Capital Requirements Directive with the purpose of aligning incentives in securitisation transactions by getting more securitiser ‘skin in the game’. Similar legislation has been adopted in the US. This article places the EU and US response to perceived shortcomings in securitisations in the context of the theoretical and empirical literature and discusses alternative regulatory solutions.

Counter-terrorist sanctions against private individuals adopted by the EU and by the UN are an exceptionally illustrative example of the executive’s power grasp, where the dangers of counter-terrorist policies and of externalized rulemaking have mutually reinforced each other. This article (re-)considers the role of the judiciary in the face of extreme exercise of externalized executive powers, demonstrates that multilayered governance has extended the powers of courts, shows that the justified exercise of judicial power has led the EU institutions and the Member States into a self-inflicted catch-22, and makes an argument that the extended powers of the executive and of the judiciary should be contained and guided by a principled choice of the constituent power. Constitutional law should require the judiciary to take a substantive approach to multilayered governance that reflects the principle of separation of powers.

We live at a time where Smart is better than Better, and Better was not Smart enough. This is not a dull pun. It actually reflects the status in which regulatory reform finds itself nowadays. To many observers, the switch from Better to Smart just reflects the attempt to instil renewed commitment and faith in an agenda, which in some (European) countries has maybe exhausted its thrust. The European Commission also admits candidly that the choice of the new term largely serves as a refreshing slogan. But limiting it to a branding change, with little consideration of its content, would be a mistake in appreciation. And a missed opportunity. We do need “Smart Regulation” – and not only in the Commission. Above all, we need smart regulators.