LLAW6093B Regulation of Financial Markets

How LLAW6093B is assessed

The course outline lists two components totalling 100%. The 30% for class participation and group presentations is assessed pass/fail; the outline says it is typically allocated as 20% for the oral presentation and 10% for participation, and that the feedback bands for it are not converted into arithmetic marks. How a pass/fail result enters the final mark is not spelled out, so ask in class. Attendance is a separate condition: seminars are compulsory, and failing to attend 70% of compulsory classes without a satisfactory explanation may lead to consequences including non-admission to the final examination, which carries 70% of the grade and without which you are likely to fail. Late take-home scripts lose five points out of 100 at once and five more per day, and none is accepted after 1:00 p.m. on 23 December 2026. Confirm the current rules on the course Moodle page.

Current LLAW6093B dates

Dates are as published in the published course outline for this offering. Confirm exact deadlines and submission settings in the live LMS.

What LLAW6093B covers

Ten chapters follow the three parts of the published syllabus, from the role of law in financial markets and the case for regulation, through rule design and regulatory styles, to regulated activities, international coordination and the crisis reforms.

Its aim is an analytical map: why financial markets depend on law, which risks they generate, and how domestic and international regulators choose between competing responses, with Hong Kong and other jurisdictions used for comparison.

Nearly everything assessed rewards one habit, which is to name the market failure, the objective it threatens and the tool that answers it, and then to say what that tool costs.

How the marks and the pass conditions work

Two components make up the grade. Class participation and group presentations carry 30% and are assessed pass/fail, typically split as 20% for the oral presentation and 10% for participation.

The take-home examination carries 70% on the full grading scale. Attendance is a separate requirement: seminars are compulsory, and failing to attend 70% of compulsory classes without a satisfactory explanation may lead to consequences that include non-admission to the final examination, which would make it impossible to pass.

Check the course Moodle page for the current rules and notify any absence in writing.

Financial Markets, Law and Regulation

The opening chapter describes what a financial system does before asking how to regulate it.

Payments, pooling savings, choosing projects, watching over them and managing risk can each be done by several kinds of institution, and markets can substitute for banks in almost every role except payments.

That overlap is the reason the reading argues for regulating by function rather than by the name on the licence.

The Legal Construction of Finance

The first seminar's required reading turns the usual story around.

Instead of markets arising naturally and law correcting them, financial instruments exist because courts and regulators will enforce them, and the enforcement is uneven: commitments bend for central banks and large dealers and bind in full for households and small states.

The chapter shows how to use that lens on a debt crisis or a rescue.

Market Failures and the Goals of Regulation

The case for intervention starts from a modest default and requires a named failure: information gaps between sellers and buyers, harm spilling onto third parties, goods that nobody pays for, concentrated markets and predictable errors of judgement.

Each regulatory goal is tied to one of these, and when goals collide the reading asks who should own the trade-off and on what evidence.

Rule Design and the Precision of Rules

A rule can be clear, easy to apply and faithful to its purpose, but rarely all three at once.

The chapter teaches a way of choosing between a bright line, an open standard and a detailed table by asking which costs dominate in the setting, and it uses the chartering of banks to show that a vague standard is sometimes the efficient answer.

Regulatory Styles and Supervisory Strategies

Where the previous chapter looks at one rule, this one looks at a whole regime and its posture towards the firms it supervises.

It compares supervision built on risk scores, on reliance on management, on high-level principles and on deterrence, and follows the United Kingdom through three architectures, with Hong Kong's own adoption of risk-based methods and a fairness charter as local illustrations.

Behavioural Biases and Nudges

People stay with defaults, overlook costs that are not visible and weigh losses more than gains.

The chapter shows what that means for regulatory design: disclosure written for how people read, defaults chosen with care, and the danger that the same techniques can steer people against their interests when used without transparency.

New Governance Techniques and the Crisis

Flexible techniques had been praised for twenty years before the crisis exposed them.

The chapter takes four of them in turn, showing how each one's strength became its weakness, and closes with the organisational, functional and cognitive reasons that explain the failures better than a simple contrast between rules and principles.

Regulated Activities and Regulatory Strategies

The second part of the syllabus asks which activities should be regulated and by which tools.

The chapter turns that into a method, from the function an activity performs to the strategy and the person who should carry the duty, and it sets out the toolkit from entry controls through conduct, disclosure, prudence and governance to insurance and resolution.

Financial Globalization and International Regulation

Money now crosses borders far more easily than the authority to regulate it.

The chapter puts the scale of cross-border finance in numbers, explains the trilemma that forces every state to give up one policy goal, traces how one bank's failure travelled abroad, and sets out the instruments of international coordination and their limits.

The Financial Crisis, Capital and Resolution

The final chapter follows the crisis of 2007 to 2009 from securitised mortgages through emergency lending and fiscal rescue to the reforms that followed: systemic oversight, capital floors, a ban on proprietary trading by banks and plans for orderly failure.

It is the chapter a problem question on a failing institution is most likely to draw on.

Worked example · free

Match the failure to the tool before recommending anything

Key terms

Market Failure

A situation in which an unregulated market does not produce an efficient outcome, such as an information gap, a spillover onto third parties, an underprovided public good, market power or systematic bias. It justifies considering intervention but does not settle it.

Information Asymmetry

A gap in which one party to a transaction, usually the seller of a financial product, knows materially more than the other, which can drive good products out and expose buyers to unsuitable ones.

Agency Cost

A loss that arises when someone acting for another, such as a fund manager or broker, can pursue their own interest through actions the client cannot observe.

Systemic Risk

The risk that distress at one institution or market spreads through interconnections, fire sales and runs to threaten the financial system and the wider economy.

Regulatory Perimeter

The boundary that decides which activities and firms are subject to a regulatory regime. Drawing it around legal form rather than economic function invites arbitrage.

Regulatory Arbitrage

The practice of structuring an activity so that it falls under a cheaper or lighter set of rules while carrying the same economic risk.

Principles-Based Regulation

A regulatory approach that relies on broad, purposive principles read for their intent rather than on detailed prescriptive rules, placing first judgement on the regulated firm.

Risk-Based Supervision

A way of allocating supervisory resources by the impact and probability of harm, which necessarily means choosing to look less closely at lower-ranked risks.

Meta-Regulation

Regulation that requires firms to design and demonstrate their own systems for managing risk and compliance, with the regulator overseeing those systems rather than prescribing behaviour.

Default Rule

The outcome that applies when a person makes no active choice, such as automatic enrolment in a savings plan with the option to leave.

Lender of Last Resort

A central bank's role of lending to solvent but illiquid institutions in a crisis, which can extend into lending against weaker collateral and creates moral hazard.

Resolution Plan

A document, sometimes called a living will, in which a large financial firm sets out how it could be wound down or restructured in an orderly way if it failed.

LLAW6093B FAQ

Questions students ask in each LLAW6093B chapter

What are the core functions of a financial system?

The reading lists five: providing a secure way to make payments at a distance, mobilising savings from those with a surplus, selecting the projects that should receive funding, monitoring those projects after funding, and helping firms and individuals manage risk. Most of them can be performed by banks or by markets. Chapter 01 · Financial Markets, Law and Regulation

What does it mean to say finance is legally constructed?

It means financial instruments are promises whose value depends on being enforced, so they exist only because a legal system will back them. Which promises are enforced, and across which borders, shapes how far a market can reach and which new instruments can be sold. Chapter 02 · The Legal Construction of Finance

Does a market failure automatically justify regulation?

No. The reading treats it as a starting point only. A regulator must also find an intervention that addresses the failure and show that its costs and side effects do not outweigh the benefit; otherwise a different remedy, or none, may be the right answer. Chapter 03 · Market Failures and the Goals of Regulation

Is a bright-line rule always better than a standard?

No. A bright line is easier to comply with and cheaper to apply, but it misclassifies cases its drafter did not foresee. The reading asks which cost dominates in the setting, and where misfits are expensive and cases are few, a standard can be the better choice. Chapter 04 · Rule Design and the Precision of Rules

What is risk-based supervision, and what is its weakness?

It ranks firms by the impact and probability of harm and concentrates resources where both are high. Its weakness is that low-probability, high-impact risks receive little attention, and a ranking model can be ignored in practice, as the reading's account of a mortgage lender's supervision shows. Chapter 05 · Regulatory Styles and Supervisory Strategies

What is a nudge in financial regulation?

It is a low-cost, choice-preserving tool based on evidence about how people decide, such as automatic enrolment in a savings plan, a simplified disclosure or a default that can be changed. It steers behaviour without forbidding any option. Chapter 06 · Behavioural Biases and Nudges

Did the crisis show that detailed rules work better than principles?

The reading finds no evidence for that. Detailed rules were outdated, gamed and left unenforced when their enforcers did not understand the activity, and a rule-based regulator missed a long-running fraud for years. Each technique had its own weaknesses. Chapter 07 · New Governance Techniques and the Crisis

How should a regulator decide whether a new activity needs regulating?

By asking what the activity does, which market failure it creates and which goal that failure threatens, and only then choosing a strategy. An activity with no failure behind it has no claim to regulation, and one drawn by label rather than function invites firms to move around the line. Chapter 08 · Regulated Activities and Regulatory Strategies

What is the trilemma in international finance?

It is the constraint that a state cannot have open capital markets, an independent monetary policy and a fixed exchange rate at the same time. Every monetary order in the historical reading gave up one of the three, and the choice shapes how a state can respond to a banking crisis. Chapter 09 · Financial Globalization and International Regulation

Why did the authorities rescue one investment bank but let another fail?

In the first case a private buyer was willing to proceed with central bank lending behind it. In the second there was no buyer, the firm lacked collateral the central bank could lend against, and no public body had power to absorb its losses. The failure then froze markets, which later reforms tried to prevent. Chapter 10 · The Financial Crisis, Capital and Resolution

How to study for the exam

Keep a two-column page for the whole semester: market failures on the left, regulatory tools on the right. After each seminar, add the case discussed and draw the line from its failure to the tool the class preferred, noting the side effect. By the time the paper is released you will have a map that turns a crowded problem into an ordered list of issues, which is exactly what the problem question tests.

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