Financial law is the law and regulation of the commercial banking, capital markets, insurance, derivatives and investment management sectors. Understanding financial law is crucial to appreciating the creation and formation of banking and financial regulation, as well as the legal framework for finance generally. Financial law forms a substantial portion of commercial law, and notably a substantial proportion of the global economy, and legal billables are dependent on sound and clear legal policy pertaining to financial transactions. Therefore financial law as the law for financial industries involves public and private law matters. Understanding the legal implications of transactions and structures such as an indemnity, or overdraft is crucial to appreciating their effect in financial transactions. This is the core of financial law. Thus, financial law draws a narrower distinction than commercial or corporate law by focusing primarily on financial transactions, the financial market, and its participants; for example, the sale of goods may be part of commercial law but is not financial law. Financial law may be understood as being formed of three overarching methods, or pillars of law formation and categorised into five transaction silos which form the various financial positions prevalent in finance.
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Financial regulation can be distinguished from financial law in that regulation sets out the guidelines, framework and participatory rules of the financial markets, their stability and protection of consumers, whereas financial law describes the law pertaining to all aspects of finance, including the law which controls party behaviour in which financial regulation forms an aspect of that law.
Financial law is understood as consisting of three pillars of law formation, these serve as the operating mechanisms on which the law interacts with the financial system and financial transactions generally. These three components, being market practices, case law, and regulation; work collectively to set a framework upon which financial markets operate. Whilst regulation experienced a resurgence following the financial crisis of 2007–2008, the role of case law and market practices cannot be understated. Further, whilst regulation is often formulated through legislative practices; market norms and case law serve as primary architects to the current financial system and provide the pillars upon which the markets depend. It is crucial for strong markets to be capable of utilising both self-regulation and conventions as well as commercially mined case law. This must be in addition to regulation. An improper balance of the three pillars is likely to result in instability and rigidity within the market contributing to illiquidity. For example, the soft law of the Potts QC Opinion in 1997 reshaped the derivatives market and helped expand the prevalence of derivatives. These three pillars are underpinned by several legal concepts upon which financial law depends, notably, legal personality, set-off, and payment which allows legal scholars to categorise financial instruments and financial market structures into five legal silos; those being (1) simple positions, (2) funded positions, (3) asset-backed positions, (4) net positions, and (5) combined positions. These are used by academic Joanna Benjamin to highlight the distinctions between various groupings of transaction structures based on common underpinnings of treatment under the law. The five position types are used as a framework to understand the legal treatment and corresponding constraints of instruments used in finance (such as, for example, a guarantee or asset-backed security).