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30 January 2007
Transnational Capital Markets Challenge U.S., European Regulators

By Jaroslaw Anders
USINFO Staff Writer

Washington -- As global financial markets become integrated and crossborder capital flows become easier, securities regulators are struggling to maintain investor protection while encouraging international foreign direct investment.

One example, experts say, is the creation of transnational exchanges. The New York Stock Exchange (NYSE) group plans to join with Euronext N.V., a pan-European, Paris-based stock exchange with subsidiaries in Belgium, France, the Netherlands, Portugal and the United Kingdom, to create the first global securities exchange with a combined market capitalization of around $27 billion.

In a January press release, Christopher Cox, the chairman of the Securities and Exchange Commission (SEC), which regulates U.S. securities business, welcomed the deal as “a notable step in the continuing globalization of the world's capital markets.” Such integration, he said, can be achieved without giving up national regulatory controls.

When multinational exchange Euronext was created in 2000, the regulating agencies of several European countries created a “college” to jointly oversee the exchange’s activities. On January 25 the college signed a nonbinding memorandum of agreement with the SEC on “consultation, cooperation and the exchange of information related to market oversight.” The practical details of this cooperation, however, have yet to be worked out.

To many financial experts the NYSE-Euronext case illustrates both the opportunities and the problems of international capital markets integration.

In a January 24 address to the 34th Annual Securities Regulation Institute in Coronado, California, SEC Chairman Cox said such integration drives down transaction costs, directs capital “to its highest and best uses” and accelerates economic growth “for everyone on the planet.”

REGULATIONS STILL POSE OBSTACLES TO FULL INTEGRATION

According to Daniel S. Hamilton, director of the Center for Transatlantic Relations at Johns Hopkins University, the relatively free flow of investment capital between the United States and Europe already plays a predominant role in the two countries' economic relations. Over the first half of this decade, Europe accounted for more than half the total U.S. direct investment outflows and three-quarters of inflows. In 2005, U.S. foreign-affiliate income from Europe reached $106 billion. Hamilton estimates that full integration of trans-Atlantic financial markets could boost trading volume significantly.

Among the obstacles, experts say, are regulatory requirements, still established and enforced mostly by national boards and commissions. Many international investors, for example, find dealing with different corporate governance and reporting standards in different countries expensive and cumbersome.

Cox said that investors look closely at regulatory environments before committing their assets.

“After all, if investors find the regulations of a particular jurisdiction to be either so onerous as to diminish returns, or so weak as to fail to protect property rights, they will take their money somewhere else,” he said.

One suggested solution is gradual “synchronization” of financial regulations, possibly leading to the creation of a single, international securities authority. This is apparently the direction preferred by German Chancellor Angela Merkel, a strong proponent of trans-Atlantic economic integration. Speaking January 24 at the World Economic Forum in Davos, Switzerland, she called for creating uniform regulatory “structures similar to those of an internal market.”

In 2005, the European Union adopted the International Financial Reporting Standards (IFRS), which are compatible with the Generally Accepted Accounting Practices used in the United States. The so-called “Norwalk Agreement” of 2002 commits two standard-setting bodies, the U.S. Financial Accounting Board and the International Accounting Standards Board, to gradually removing the differences between their respective regulations.

But some experts doubt full synchronization is possible, or even desirable. They say it is more important that standards be clear and fairly applied. Cox pointed out that regulatory variations “reflect differences in culture, legal systems and market structure” and that some people believe full integration of capital markets to be impossible. He said that national regulators will remain important, although they will have to work with like-minded counterparts to find new ways of performing their duties.

Although they differ in specific recommendations, experts on both sides of the Atlantic predict that regulatory barriers to crossborder investment will gradually come down and that regulatory cooperation will be an important part of the process. They also expect that financial integration soon will extend to areas beyond the Atlantic region.

Cox predicted that in a short time “the structure of the planet’s exchanges and trading platforms will be completely rebuilt.” This perspective, he said, brings both opportunities and new threats -- of fraud, unethical trading, market manipulation -- and it is the job of national regulators to protect investors while promoting market integrity.

The full text of Cox’s speech is available on the SEC Web site, as is the memorandum of understanding between the SEC and the College of Euronext.

(USINFO is produced by the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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