New world order
The completion in April of the merger between Paris-based Euronext and NYSE Group, owner of the New York Stock Exchange (NYSE), and the imminent merger between Eurex and the New York-based International Securities Exchange has raised some pertinent questions regarding regulation. Top of the list is how the exchanges are going to manage multiple regulations across different geographical jurisdictions.
The response from NYSE Euronext is that both exchanges will operate as they always have following the merger, and answer to the same regulators. "We are not trying to change any regulatory structures, so both exchanges will continue to operate as they always have," says Richard Ketchum, chief executive of NYSE regulation. "US regulators may be interested over time if Euronext.liffe activities venture further into US territory. But at the moment, there is no proposal to integrate all activity into one single book."
However, in a world in which investors can choose where to trade, every national government and regulator is facing new challenges to impose and enforce securities regulations that meet the global, 24-hour culture of financial markets.
Cross-border mergers between exchanges are not new. Euronext built itself up across Europe with several acquisitions, including the purchase of the London International Financial Futures and Options Exchange (Liffe) and a merger with the Portuguese exchange in 2002. This arguably marked one of the first turning points for increased co-operation between various national supervisors. Creating a College of Regulators to regulate Euronext and its derivatives arm, Euronext.liffe - comprising the Authority for the Financial Markets in the Netherlands, Autorite des Marches Financiers in France, the Banking Finance and Insurance Commission in Belgium, the Comissao do Mercado de Valores Mobiliarios in Portugal and the Financial Services Authority (FSA) in the UK - the EU took dynamic steps forward to address issues of multiple regulations.
However, while much similarity exists across the various jurisdictions of Europe - likely to increase further with pan-European regulation such as the Markets in Financial Instruments Directive - mergers with exchanges in the US have pushed the issue of global regulation back to centre stage. Industry participants fear that transatlantic mergers may result in bourses, exchange members and even end-users being subject to regulations outside their supervisory jurisdictions. In response, European and US regulators are addressing this potential regulatory overspill by forging official working relationships with overseas counterparts.
"Let transatlantic markets serve as the leading light of globalisation. Financial market integration runs deepest between the European Union and the US, so we should lead by example," urged Charlie McCreevy, European commissioner in charge of the internal market and services, at a conference in Dublin in March. "Demonstrate to the world how regulators, supervisors and legislators can co-operate effectively. If we fail to do this, there is little hope of exporting our methods to emerging markets. If we succeed, we can lay down many of the parameters of twenty-first century financial regulation."
It's a sentiment the regulators themselves say they share. The US Commodity Futures Trading Commission (CFTC) has declared that collaboration with overseas regulators is crucial in supervising exchanges. Speaking at the Futures Industry Association's annual conference in Boca Raton, Florida in March, CFTC chairman Reuben Jeffery described how it is working with the UK's FSA.
"For example, last year, when questions were raised regarding the possible impact on US markets of new contracts that traded on London-based Ice Futures but that settled off New York Mercantile Exchange prices, the CFTC and the UK's FSA agreed to share information needed to detect potential abusive or manipulative trading practices in these related contracts. In addition to sharing surveillance data, FSA and CFTC staffs have initiated an ongoing monthly dialogue to exchange views on market events."
Information sharing among regulators is also top of the agenda for the US Securities and Exchange Commission (SEC). Christopher Cox, SEC chairman, speaking at the 34th annual Securities Regulation Institute conference in California in January, said the SEC has made great strides in recent years in sharing enforcement information with regulators overseas.
"Working with all the world's regulators who share this belief in the power of markets, we can tap that same principle, so that a multiplicity of jurisdictions - each seeking to develop the best regulatory framework - can likewise investigate their options and make their own decisions about ways to handle regulatory issues within their borders," he said. "This is something from which we can all benefit: observing what works, and how the market responds, and learning from what doesn't work."
Nonetheless, further steps are being taken to cement relationships between global regulators. For example, the SEC and the College of Euronext Regulators signed a memorandum of understanding in January. Commenting on the agreement, the SEC's Cox stated: "The combination of major US and European stock exchanges marks a notable step in the continuing globalisation of the world's capital markets. This arrangement reflects a modern approach to the oversight of globally active institutions and underscores the intent of securities regulators on both sides of the Atlantic to work together to co-ordinate our supervisory efforts."
The SEC has also forged an agreement with the FSA and the UK's Financial Reporting Council. The aim is to implement a work plan between the US regulator and the Committee of European Securities Regulators to share information on the application of International Financial Reporting Standards (IFRS) by issuers listed in the UK and the US. In view of the growing acceptance of IFRS around the globe, this is potentially an important example of a regulation achieving global status.
Much of these initiatives build on concepts underlying the International Organisation of Securities Commissions' (Iosco) multilateral memorandum of understanding (MOU) concerning consultation and co-operation and the exchange of information, established in 2002. Created to promote co-operation and greater exchange of information among regulators, there are currently 41 Iosco members that have signed the MOU, with recent signatories including the Bermuda Monetary Authority, the Financial Services Commission of the British Virgin Islands, the China Securities Regulatory Commission, Commission de Surveillance du Secteur Financier of Luxembourg and the Securities Commission of Malaysia.
Speaking at the final communique of the thirty-second annual conference of Iosco in Mumbai in April, the chairperson of the Iosco executive committee, Jane Diplock, said: "The increased capability of regulators to co-operate is vital as capital markets become increasingly global. The effort Iosco is driving via the MOU, as well as other initiatives, is already delivering positive results and will continue to bring benefits to securities markets worldwide, including to investor confidence."
While most of the work has focused on sharing information and strengthening co-operation between supervisors, there is still concern about the existence of multiple regulatory regimes and the impact on institutions that trade in several jurisdictions. That is high on the agenda for the Futures and Options Association (FOA), a London-based industry body.
"The FOA has initiated a European Union/US coalition on financial regulation. We released the first report on rules looking at several global regulators in September 2005, and we are now working on a second report, due in late June or early July, where we have prioritised a regulatory wish-list of what the regulators should be working on," reveals Anthony Belchambers, chief executive of the FOA.
The FOA believes the initiative will highlight several key points, including the need for the industry to have a proper voice in the regulatory process, and to work towards efficient, simplified regulation. "The recent mergers are a practical example of markets becoming transatlantic. However, it is not just the exchanges - it is also among the market infrastructure providers. Regulators need to be forward thinking about how they will regulate this," adds Belchambers.
Some regulators share these concerns. In particular, if the structures of the new transatlantic exchanges alter - for instance, if they become single entities in an attempt to maximise synergies - it could necessitate a change in regulatory treatment, and for a single supervisor to take the lead.
"We believe there could be circumstances where a more complex regulatory position might arise," said Callum McCarthy, chairman of the FSA, in a recent speech. "Theoretically, in the longer term, a new entity might seek to achieve further benefits from rationalisation of its regulatory structure. If such a market were to be operated from the US, it would require member firms and issuers to be registered with the SEC and subject to its oversight." These are the same concerns raised by some industry members regarding NYSE Euronext (see box).
However, few believe in a 'one-size-fits-all' solution. "Regulation does not need to be of an identical shade in every jurisdiction. Choice of regulatory framework and competition between states can be healthy. But the principles should be similar," surmises McCreevy.
For the moment, the regulators are singing from the same hymn sheet, with a united aim for high-level international standards, transatlantic co-operation and information sharing between regulators. Whether any single regulator will eventually try to exert more influence, or attempt to impose its domestic rules on an international stage, remains to be seen. Whatever steps are taken, one thing is sure - significant changes will be made as the parameters of twenty-first century financial regulation are set down.
BUSINESS AS USUAL FOR NYSE EURONEXT
One of the industry concerns about the NYSE Group merger with Euronext was that European exchanges' members may be subject to the US Sarbanes-Oxley regulation.
However, prior to the merger, law firm Cleary, Gottlieb, Steen & Hamilton released a detailed letter on behalf of Euronext addressing industry concerns about the structure of the exchanges following the merger and the implications it may have on regulation.
Ownership of Euronext by the new holding company will not cause Euronext or its listed companies to become subject to US exchange laws or regulations, the letter stated. The combined group does not intend to be a single exchange, but will maintain local regulation of the various subsidiaries.
"Accordingly, we believe, and we understand that Euronext believes, that the risk of overspill of current US securities laws and regulations into European markets as a result of the transaction is not real. While of course one cannot predict the future with certainty, we and Euronext also believe, in light of the policy foundations of the US securities laws and the transatlantic regulatory and diplomatic framework, that the risk of such overspill resulting from future changes in laws is remote," the letter stated.
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