The European Union as hardening agent: soft law and the diffusion of global financial regulation

Soft law promulgated by transnational networks is one of the hallmarks of governance in global finance. Standard accounts alternatively view such governance as a fast and flexible solution to transnational problems or weakly institutionalized club standards epiphenomenal to great power interests. We argue that dominant perspectives' view of soft law is misguided, as soft law in global finance cannot be understood in isolation from domestic law. Viewing soft law through the prism of multilevel governance highlights the role European integration in particular plays in hardening' soft law provisions, thereby shaping the global diffusion of such standards. As soft law becomes embedded in domestic law, its certainty and durability are enhanced while at the same time its flexibility is reduced. Case studies of the diffusion of international accounting standards and close-out netting rules for over-the-counter derivatives provide empirical support for the importance of domestic law in the global diffusion of soft law.