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Are ISDA s standards democratically legitimate?

In order to assess the democratic legitimacy of ISDA’s influence, we need to start from a working assumption of what democratic legitimation means. Instead of just following one theory of democratic legitimacy, we distinguish three types of democratic theories, each of which we will briefly address in their most prominent version. The first is the most widespread type of democracy, so widespread that it is often identified with democracy as such and therefore lacks a more illustrative catchword. It could be called ‘Aggregative’ or ‘Voting Democracy’, meaning that democratic legitimation is essentially derived from acts of voting. The second is ‘Deliberative Democracy’ in its Habermasian version (Habermas 1996), the third a theory of ‘Agonistic Pluralism’ as proposed by Mouffe, where legitimacy originates from continuous confrontation in a system of adversarial antagonistic structures (Mouffe, 1999).

Each of the three theories derives legitimacy from a direct involvement of the people concerned in the respective act of power exertion. Accordingly, we will not focus on the question to what extent ISDA’s exertion of power would be legitimate in terms of output legitimacy, but focus on the degree to which ISDA is open to different sorts of direct democratic involvement.

This, in turn, presupposes a definition of the relevant demos. Depending on which approach we depart from, a definition of the demos could be limited to ISDA members only or, since ISDA operates worldwide, extended to every citizen on earth. With regard to the modest scope of this paper, we pragmatically limit the demos to those who are demonstrably affected by ISDA’s exertion of power, that is, banks and dealers, but also the homeowner of our initial example who might not have been granted credit, had there not been such a thing as derivatives trading.

ISDA and the standards of ‘Voting Democracy’ In a ‘Voting Democracy’ a decision is democratically legitimate because it has been adopted by acts of voting. In its less demanding and far more common layout - the ‘Representative Voting Democracy’, the demos doesn’t vote on every single decision, but elects officials who are thereby mandated to decide. In this constellation, the demos comprises at least all those who are affected by the decision. Or so it goes in theory. As Joerges has pointed out, every nation-state takes decisions that also affect those who have no right to vote for the officials of that state - be it because there are people living in that state who have no right to vote or because in a globalised world the decisions taken by the government of one state very often directly affect the people living in another state (Joerges 2007, p. 7). But this phenomenon only reduces the democratic legitimacy of nation-states from a voting perspective. It does not alter the definition of democratic legitimacy.

If we apply the standards of ‘Voting Democracy’ to ISDA, the result is mixed. We know that ISDA’s chairman is elected by its board of directors, and we know that the directors are elected during the association’s general meetings, most likely by representatives of ISDA’s members (ISDA 2011). It is less clear how the members of ISDA’s numerous committees are chosen, but even if this does not happen through acts of voting, legitimacy could be derived from a chain of legitimacy - well-known from nation-states.

Obviously this makes ISDA’s decisions only legitimate with regard to its members. Other stakeholders, such as our homeowner, are left aside. One could compare this to citizens of one state that are affected by the decisions taken by officials of a foreign state. But whereas each citizen is represented by his government on the international level, our homeowner lacks a similar powerful representation of his interests. From the perspective of a legitimacy theory based on preference aggregation through acts of voting, ISDA’s legitimacy is thus much weaker than that of state-made law.

ISDA and the standards of ‘Deliberative Democracy’ In a deliberative democracy, a decision is legitimate if it evolves from a process of deliberation including the possibility of equal and symmetrical participation of every possibly affected person in the deliberation itself as well as equal rights to determine the rules of the discourse procedure (Benhabib 1996, p. 70). The ‘ideal speech situation’ (Habermas 1990, p. 43), defenders of this theory have admitted, is rather a regulative idea. Democratic legitimacy thus has to be gradually measured by determining the difference between the actual decisionmaking process and an ideal deliberation process. We do not know much about ISDA’s internal deliberation methods. We do not know how the Definitions Committees reach their decisions. We know that different levels of ISDA membership are open to potential users of their documents and all members are generally allowed to join the various expert committees. However, there seem to be no official rules laying down the composition of these committees. The decision who is ultimately invited to take part in the deliberations seems to be taken by ISDA’s staff. It appears that this formal lack of equal treatment has not caused any substantial discontent among potential users. This is not surprising, since its role as a lobbyist obliges ISDA to scrutinise its members’ interests. During the development of the ISDA/IFFM Tahawwut Master Agreement, an equivalent to the ISDA Master Agreement for transactions in Islamic derivatives, this entailed an extremely lengthy drafting process, resulting in the consultation of countless scholars and 24 official drafts before the final version was adopted (IIFM and ISDA 2010). As far as potential users of ISDA’s documents are concerned, we not only observe that deliberation occurs, but also that its results are reflected in the final decisions. The genesis of the Tahawwut Agreement suggests that some of ISDA’s decision-making processes might come as close to the ideal of deliberative democracy as democratic nation-state legislation.

On the other hand, recent medial outcries related to the power of ISDA’s Definitions Committees show that by far not all parties affected by ISDA’s decisions have equal access to the deliberations. Again, the exclusion of parts of the demos causes a severe lack of democratic legitimacy. According to standards of Deliberative Democracy, ISDA’s decision making therefore can at best be considered legitimate for those who are part of the organisation, but not democratically legitimate in the sense that all affected parties are equally involved.

ISDA and the standards of ‘Agonistic Pluralism’ In simplified terms, the theory of ‘Agonistic Pluralism’ originates from a Wittgensteinian critique of deliberative-democratic models, challenging ‘the very idea of neutral or rational dialogue’ (Mouffe 1999, p. 749). For Wittgenstein, agreements aren’t a ‘product of reason' but rather a ‘fusion of voices made possible by a common form of life’ (Mouffe 1999, p. 755), for the parties to a conflict may well give reasons for their point of view but ‘at the end of reasons comes persuasion’, that is, an uncircumvenable, axiomatic set of ideas that one gives up through an act of conversion rather than of rational conviction (Mouffe 1999, p. 755).

Departing from the idea that ‘every consensus exists as a temporary result of a provisional hegemony, as a stabilisation of power' entailing ‘ some form of exclusion', this theory refrains from all holistic approaches to society, cultivating ‘the expression of conflicting interests and values' and continuous contestation (Mouffe 1999, p. 756). It stresses the need for structures that allow perpetuating and stabilising the confrontation of opposing views in order to transform existing antagonism into the agonism that, according to this theory, is vital for every political system.

It is not impossible, maybe even likely, that within the circle of ISDA's members such opposing groups exist and that ISDA somehow has developed structures to cope with differing preferences. But all other stakeholders whose views probably differ in a far more fundamental way from the ISDA mainstream are excluded from the decision making. Since ISDA is a lobbying group, the exclusion of conflicting views from its decision-making processes is enshrined in its nature. At this stage, the Janus-faced role of ISDA as a lobbying group and an organisation which governs the central legal document in the OTC trading market, and thus has influence far beyond its lobbying activities, becomes highly problematic.

Possible reforms towards more democratic legitimation We must take this dual function of ISDA into account when we depart from the rather negative results of this brief assessment of democratic legitimacy and try to examine whether it would theoretically be possible to reform ISDA in a way that increases the democratic legitimacy of its decisions while preserving its societal nature.

From the perspective of what we called ‘Voting Democracy', no plausible proposition can be made. If every stakeholder was allowed to vote for the composition of ISDA’s board or even to take part in referenda on ISDA’s policies, ISDA would no longer be a lobbying group and ultimately lose its societal character. In contrast to that, from the perspective of Deliberative Democracy there is no reason why an organisation such as ISDA should not be able to engage in truly deliberative processes of decision making, since in an ideal speech situation there is only one ideal decision to be adopted in every given situation. But this is either wishful thinking or simply based on wrong assumptions if one follows Mouffe’s critique. From her standpoint, ISDA’s nature as a lobbying group makes truly democratic processes impossible, since it systematically excludes opposing views. In addition to that, doubts arise as to whether societal transnational organisations - even if they are not lobbying for the interests of a specific branch - can ever be democratic. According to Teubner, movements of societal constitutionalism essentially depend on the upholding of the inclusion/exclusion difference in a global transnational sphere through acts of ‘self-constitution’ as well as ‘self-limitation’, excluding those that are not affected by the problems the respective function system deals with. Exclusion thus is, in fact, a constitutive element of societal constitutionalism (Teubner 2004, p. 2).

From Mouffe’s point of view, however, exclusion puts democracy at risk. Convinced that it is impossible to establish a ‘consensus without exclusion’, she argues against the consensual approach of Deliberative Democracy. If exclusion is thus vital for societal constitutionalism and fatal for democracy, one could reach the conclusion that societal constitutionalism cannot be democratic. But when Mouffe refers to exclusion, she means exclusion of opposing views, that is, substantive exclusion, whereas the exclusion inherent to the dynamic of societal constitutionalism is primarily of formal nature, excluding those who are not affected by a particular issue.

The problem we see arises from the danger that such a formal exclusion becomes substantial, that within structures of societal constitutionalism consensus-generating hegemonic structures arise and prevent the agonistic clash of differing opinions that is of central importance for Mouffe’s understanding of democracy from unfolding. One could object that the danger of hegemonic rule is just as great within a nation-state, since it is due to dynamics intrinsic to majority rule rather than to the specific nature of transnational societal constitutionalism. But from the perspective of ‘Agonistic Pluralism’ the nation-state has one important structural advantage: its constitutive inclusion/exclusion difference is of territorial nature. Its territorial boundedness induces a sort of pressure that makes continuous agonistic clashes far more likely to happen than in the ‘nonterritorial’ sphere of societal constitutionalism where antagonists are less required to enter into compromise than in the national arena of limited territoriality. The need for compromise so urgently felt at the national level makes it seem a logical consequence to resort to procedural instruments such as the protection of minorities that promote continuous contestation and prevent Tocqueville’s notorious ‘tyranny of the majority’ (Tocqueville 1840,p. 135)-an early ancestor of Mouffe’s ‘hegemonic consensus’ - from coming into existence. The same element that represents a major shortcoming of the nation-state from a societal point of view - its territorial boundedness - thus turns out to be a crucial advantage when examining its democratic potential.

This has several implications for the democratic potential of organisations such as ISDA. First, their decisions tend to be legitimate only for those who are included in the organisation. Only within the organisation do voting, deliberation or even contestation occur. As long as organisations such as ISDA represent particular interests, democratic legitimacy derived from an involvement of all affected parties cannot be attained. But even beyond the problem of advocacy, societal transnational organisations are less likely to develop democratic structures since they are not confronted with the same urgent need to form stable agonistic structures that results from the territorial boundedness of the nation-state.

External stakeholders such as our homeowner thus ultimately rely on the regulatory authority of the nation-state. Accordingly, the most reliable source for (indirect) democratic legitimacy of ISDA’s standards is their need for compliance with national law. The ISDA Master Agreement needs to be enforceable under national jurisdictions, that is, most often democratically legitimate law. Consumer interests can therefore be adequately coped with in the national arena. Examples are Article 8 of the Consumer Credit Directive 2008/48/EC or Art. 14 of the amendment proposal COD 2011/0062, the former establishing an obligation to assess a consumer’s creditworthiness, the latter sharpening this obligation by stating that no consumer shall be given credit beyond her creditworthiness. Problems arise only when cases of ‘regulatory capture’ occur, but as Young points out, this might happen considerably less often than recent academic debates assume (Young 2012).

Societal regulatory authorities and the nation-state - a complementary relationship

The emergence of ISDA bears signs of a partial reembedding of debt. ISDA provides a centralised organism for the governance of deriva- tives-trading contracts (Wielsch 2012, p. 1088). Certain elements seem to imitate structures known from the political sphere of the nation-state. However, ISDA’s standards lack genuine democratic legitimacy. Accordingly, it is no full equivalent to the embeddedness of credit relations within the sphere of the ‘economic constitution’. Rather, functional differentiation seems to have reached a new stage. Highly professional private actors which accumulate expertise presumably exceeding that of most nation-state authorities operate as powerful standard setters. At the same time, nation-states can provide indirect democratic legitimacy of these standards as long as they have the monopoly to enforce them.

 
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