Regulatory harmony is in the air
Saturday, 29 September 2007
Jeremy Grant
When Britain's Queen Elizabeth visited the US state of Virginia this year, she marked the quadricentennial of Jamestown, the first permanent English settlement in America. The visit rekindled an old connection between the City of London and the US, as the settlement was established thanks to financial backing from bankers in the Square Mile.
While London and New York have since then more often than not competed with each other as financial centres to attract international business, this year that may be changing. The two have begun a dialogue to help the world's largest financial groups do business more efficiently in both places. For the first time, regulators and the private sector are moving in tandem to reduce barriers to cross-border finance.
The fact that the cities were able to put aside their rivalry shows how hand-wringing in the US about the competitiveness of its capital markets - while still a hot topic - is prompting action on something much bigger: a need to reduce regulatory barriers to improve transatlantic financial markets.
Roel Campos, a commissioner at the US Securities and Exchange Commission, says: "I think we are at a unique moment in time, and that is that regulators as well as private sector players realise it's important to make progress towards several objectives that would help trans-border commerce in financial services."
Citigroup, which operates globally, chafes at having to deal with more than 40 regulators where it does business. Edward Greene, general counsel for markets and banking, says that while the capital markets of the US and Europe are the most developed, they are also the most regulated, with "a multitude of conflicts between securities regulations that artificially separate those two markets".
He adds: "The challenge is not so much US competitiveness versus somewhere else but rather: why can't we blend and make seamless the two most powerful markets?"
James Leigh-Pemberton, a managing director at Credit Suisse, says investors on both sides of the Atlantic are more interested than ever in making cross-border equity investments. Yet such investments "continue to be impeded by various local requirements". The investment community is "feverishly working around regulatory strictures in a manner that imposes greater costs than necessary".
For years, officials paid lip-service to the idea of closer regulatory co-operation. But it took the creation of NYSE-Euronext, the world's first transatlantic stock and derivatives exchange - followed by the purchase by Frankfurt's Deutsche Börse of the International Securities Exchange, a US options platform - to jolt regulators into action.
Since then, there has been a shift at the SEC, where Christopher Cox, its chairman, often highlights a need to view US markets "not in isolation but rather as part of a global marketplace". The SEC was often accused of looking down on its foreign counterparts. Yet in the past year it has been boosting co-operation with the Financial Services Authority in Britain and Germany's BaFin. The talk is of "mutual recognition" by watchdogs, to cope better with cross-border capital flows and to catch fraud.
Progress is also being made towards a convergence in accounting and auditing standards. The SEC stunned observers this year when it suggested that not only would foreign companies listed in the US no longer have to reconcile their accounts under International Financial Reporting Standards to US Generally Accepted Accounting Principles but that US companies might even be allowed to switch to IFRS.
Politically, the transatlantic effort is receiving strong backing too. In April, German chancellor Angela Merkel and US President George W.?Bush created a special economic council to push for the reduction in transatlantic regulatory friction. The Transatlantic Policy Network, grouping US and EU politicians, executives and academics, is pushing for a "roadmap" towards creating a transatlantic financial market by 2015. Reducing compliance costs is on the agenda.
Bob Bennett, a Utah senator who is chairman of the network, says the Europeans are on the one hand "delighted that the Americans are shooting themselves in the foot" by having a legal and regulatory system that is perceived as deterring foreign capital. The usual targets for blame are the 2002 Sarbanes-Oxley law on compliance and a culture of litigation.
"On the other hand they [Europeans] are also uneasy at the slippage in US leadership. It's a hot topic not just on our part, but even among those who you would suspect are favourable to the trend because while they get the benefits of it, they are nonetheless nervous about keeping the US capital markets strong."
That explains why Hank Paulson, US Treasury secretary, has received the support of Charlie McCreevy, EU internal markets commissioner, in developing a "blueprint of structural reforms", expected next year. Mr McCreevy has said regulators were now "condemned to co-operate".
The private sector has seized on this shift, with a proliferation of coalitions and commissions racing to be first with the best fixes for the problem. The US Chamber of Commerce six months ago set up a Center for Capital Markets Competitiveness. The Financial Services Roundtable, which groups 100 of the biggest financial services groups, will soon launch a report that will deal with the issues.
The SEC is keen to take the lead globally on issues such as mutual recognition, for fear of other regulators seizing the initiative. It wants to ensure that it leads a "race to the top" in designing a new framework for financial services regulation.
But mutual recognition could become bogged down in disagreement over how it would work. There is also a need to ensure consistency among the growing number of initiatives that are emerging. The International Organisation of Securities Commissions (Iosco), the grouping for the world's financial regulators, has just started its own initiative on regulatory convergence.
The EU-US Coalition on Financial Regulation meanwhile wants to eliminate overlapping disclosure requirements in securities offerings between the US and EU. Anthony Belchambers, its co-head, says the uncertainty over regulatory harmonisation shows how everyone "needs to get greater consensus around what we are saying".
The downside of more organisations being involved is that "there will be more negotiating parties at the table". But he notes an upside in the Iosco initiative in that it promises to involve other world financial centres such as Japan.
"There needs to be an awareness on the part of regulators that there are significant commercial drivers of this, as well as regulatory drivers, and the two have to be married up for everyone to benefit. There's something in this for everyone, so we have to make sure there are the proper people around the table to make that happen."
When Britain's Queen Elizabeth visited the US state of Virginia this year, she marked the quadricentennial of Jamestown, the first permanent English settlement in America. The visit rekindled an old connection between the City of London and the US, as the settlement was established thanks to financial backing from bankers in the Square Mile.
While London and New York have since then more often than not competed with each other as financial centres to attract international business, this year that may be changing. The two have begun a dialogue to help the world's largest financial groups do business more efficiently in both places. For the first time, regulators and the private sector are moving in tandem to reduce barriers to cross-border finance.
The fact that the cities were able to put aside their rivalry shows how hand-wringing in the US about the competitiveness of its capital markets - while still a hot topic - is prompting action on something much bigger: a need to reduce regulatory barriers to improve transatlantic financial markets.
Roel Campos, a commissioner at the US Securities and Exchange Commission, says: "I think we are at a unique moment in time, and that is that regulators as well as private sector players realise it's important to make progress towards several objectives that would help trans-border commerce in financial services."
Citigroup, which operates globally, chafes at having to deal with more than 40 regulators where it does business. Edward Greene, general counsel for markets and banking, says that while the capital markets of the US and Europe are the most developed, they are also the most regulated, with "a multitude of conflicts between securities regulations that artificially separate those two markets".
He adds: "The challenge is not so much US competitiveness versus somewhere else but rather: why can't we blend and make seamless the two most powerful markets?"
James Leigh-Pemberton, a managing director at Credit Suisse, says investors on both sides of the Atlantic are more interested than ever in making cross-border equity investments. Yet such investments "continue to be impeded by various local requirements". The investment community is "feverishly working around regulatory strictures in a manner that imposes greater costs than necessary".
For years, officials paid lip-service to the idea of closer regulatory co-operation. But it took the creation of NYSE-Euronext, the world's first transatlantic stock and derivatives exchange - followed by the purchase by Frankfurt's Deutsche Börse of the International Securities Exchange, a US options platform - to jolt regulators into action.
Since then, there has been a shift at the SEC, where Christopher Cox, its chairman, often highlights a need to view US markets "not in isolation but rather as part of a global marketplace". The SEC was often accused of looking down on its foreign counterparts. Yet in the past year it has been boosting co-operation with the Financial Services Authority in Britain and Germany's BaFin. The talk is of "mutual recognition" by watchdogs, to cope better with cross-border capital flows and to catch fraud.
Progress is also being made towards a convergence in accounting and auditing standards. The SEC stunned observers this year when it suggested that not only would foreign companies listed in the US no longer have to reconcile their accounts under International Financial Reporting Standards to US Generally Accepted Accounting Principles but that US companies might even be allowed to switch to IFRS.
Politically, the transatlantic effort is receiving strong backing too. In April, German chancellor Angela Merkel and US President George W.?Bush created a special economic council to push for the reduction in transatlantic regulatory friction. The Transatlantic Policy Network, grouping US and EU politicians, executives and academics, is pushing for a "roadmap" towards creating a transatlantic financial market by 2015. Reducing compliance costs is on the agenda.
Bob Bennett, a Utah senator who is chairman of the network, says the Europeans are on the one hand "delighted that the Americans are shooting themselves in the foot" by having a legal and regulatory system that is perceived as deterring foreign capital. The usual targets for blame are the 2002 Sarbanes-Oxley law on compliance and a culture of litigation.
"On the other hand they [Europeans] are also uneasy at the slippage in US leadership. It's a hot topic not just on our part, but even among those who you would suspect are favourable to the trend because while they get the benefits of it, they are nonetheless nervous about keeping the US capital markets strong."
That explains why Hank Paulson, US Treasury secretary, has received the support of Charlie McCreevy, EU internal markets commissioner, in developing a "blueprint of structural reforms", expected next year. Mr McCreevy has said regulators were now "condemned to co-operate".
The private sector has seized on this shift, with a proliferation of coalitions and commissions racing to be first with the best fixes for the problem. The US Chamber of Commerce six months ago set up a Center for Capital Markets Competitiveness. The Financial Services Roundtable, which groups 100 of the biggest financial services groups, will soon launch a report that will deal with the issues.
The SEC is keen to take the lead globally on issues such as mutual recognition, for fear of other regulators seizing the initiative. It wants to ensure that it leads a "race to the top" in designing a new framework for financial services regulation.
But mutual recognition could become bogged down in disagreement over how it would work. There is also a need to ensure consistency among the growing number of initiatives that are emerging. The International Organisation of Securities Commissions (Iosco), the grouping for the world's financial regulators, has just started its own initiative on regulatory convergence.
The EU-US Coalition on Financial Regulation meanwhile wants to eliminate overlapping disclosure requirements in securities offerings between the US and EU. Anthony Belchambers, its co-head, says the uncertainty over regulatory harmonisation shows how everyone "needs to get greater consensus around what we are saying".
The downside of more organisations being involved is that "there will be more negotiating parties at the table". But he notes an upside in the Iosco initiative in that it promises to involve other world financial centres such as Japan.
"There needs to be an awareness on the part of regulators that there are significant commercial drivers of this, as well as regulatory drivers, and the two have to be married up for everyone to benefit. There's something in this for everyone, so we have to make sure there are the proper people around the table to make that happen."